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DoubleLine Round Table Prime 1-6-20 - Segment 3: Best Ideas

The biggest risks and tradable opportunities discussed by the panel members focus on the fixed income markets but it did get me to thinking where I see the biggest risks and where are the biggest opportunities right now.

Freddie Mac - DoubleLine Round Table Prime 1-6-20 - Segment 3: Best Ideas

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Comments of the Day

24 January 2020

 

Video commentary for January 23rd 2020

 

Eoin Treacy's view

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: what are the most credible risks to markets, continued surge in liquidity and where the opportunities lie. 

 

 

DoubleLine Round Table Prime 1-6-20 - Segment 3: Best Ideas

This third part of the round table may be of interest to subscribers.

 

Eoin Treacy's view

The biggest risks and tradable opportunities discussed by the panel members focus on the fixed income markets but it did get me to thinking where I see the biggest risks and where are the biggest opportunities right now.

 

 

Federal Reserve's Repo Market Fix Is No Fix at All

This article by Jim Bianco for Bloomberg may be of interest to subscribers. Here is a section:

Unfortunately, the Fed made a critical design error in its daily interventions. They are offering to supply repo to the dealers at prevailing market rates. In other words, they are giving the dealers every incentive to take repo from the Fed as opposed to the market. In essence, the Fed has become the lender of first resort when it should be the lender of last resort and offer repo at a penalty rate. The Fed should be willing to help a dealer in need, but it should come at a price.

So, after four months of these Fed repo operations, new problems are emerging. More specifically, the Fed might be going too far and oversupplying this market. The effective federal funds rate is signaling there are enough reserves in the banking system. This month it traded at 1.54%, breaking below the interest on excess reserves (IOER) floor of 1.55% for the first time in 14 months. This is happening as the Fed announces it will continue to plow ahead with Treasury bill purchases and supplying hundreds of billions of dollars of repo supply until April, if not later.

What should the Fed do? It has already telegraphed it will raise the IOER rate by five basis points to 1.60% at the Federal Open Market Committee meeting next week. Presumably, it will also raise the repo offered rate by five basis points to 1.60%. Policy makers should raise the repo rate even higher. Stand ready to offer liquidity, but at a penalty rate.

This won’t fix the problems in the repo market; only rule changes can do that. But at least this will allow the Fed to identify how much supply is needed to get the market back in balance rather than risking a loss of control of the federal funds rate altogether.

The Fed should not be looking to permanently insert itself into the repo market via a standing repo facility. Repo is still a credit market, and, in times of stress, it requires a credit decision when deciding who gets a collateralized loan and at what terms. Central banks are not equipped to make these decisions, and their involvement could create a moral hazard, making things worse.

 

Eoin Treacy's view

The Fed panicked with their response to the repo market freeze in September. The “short-term” fix introduced had the desired effect and the monetary markets are once again flowing freely. However, the cost has been prohibitive and the big question today is whether this action is an example of what we can expect from the future or is it a once-off deal.

 

 

Email of the day - on liquidity and markets

you wrote "liquidity remains the fuel on which the advance depends". my question is as follows. Could the benefits of the refinancing of the US home mortgages give consumer spending a boost and thus the stock market and secondly will investors take capital out of bonds into the stock market to fuel this market even further. It looks key to be able to measure the importance and condition of all the different fuels and knowing when we run out of fuel. looking forward to your long-term analyses.

 

Eoin Treacy's view

Thank you for this question which may also be of interest to subscribers. The impetus to refund mortgages picked up pace last quarter with the 30-year Freddie Mac rate bottoming in September around 3.5%. It generally takes a few months for the refinancing to be approved and then a few more months for personal savings to accrue enough to boost spending. That does suggest we should begin to see growth picking up by the beginning of the 2nd quarter.

 

 

 

 

 

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