A discussion about the Federal Reserve's policy tool 
Bank Term Funding Program
https://www.federalreserve.gov/monetary ... rogram.htm


While it's obvious this is not QE, is there a way to measure how much liquidity flow is in this operation, *(if any).

 i.e. How this affects short-term & long-term liquidity concerns around the financial sector.

^{A thread to open DISCUSSIONS on following topics.}

LIQUiDITY TOPICS

• REVERSE REPO FACILITY - TREASURY GENERAL ACCOUNT BALANCE (RRP-TGA)  -- in terms of liquidity function
• CROSS BORDER LIQUIDITY MEASUREMENTS, 
• Yield curve control in Japan = Yen carry trade   -- Ueda cont'd liquidity for moment.
• PBoC cross-border borrowing/lending regulations - tightening or loosening?
• CoCo Contingent A1 Bonds in Europe.  Containment & ECBs, SNB's, BoE's policy responses?

The thread is about liquidity as we head in to a collateral issues.   

Bard asked: How much have banks drawn upon the lending under the Federal Reserve's recently enacted Bank Term Funding Program?

Bard responds:
According to the Federal Reserve Bank of Dallas, as of March 28, 2023, banks have drawn down $1.5 billion under the Bank Term Funding Program (BTFP). This is a small amount, compared to the total amount of lending that banks do. However, it is a sign that banks are starting to use the BTFP to get access to additional liquidity.
The BTFP is a new program that was created by the Federal Reserve in March 2023. The program allows banks to borrow up to one year of funds from the Federal Reserve at a fixed interest rate. The goal of the program is to provide banks with additional liquidity so that they can continue to lend to businesses and consumers.
The BTFP is a voluntary program, and banks are not required to participate. However, the Federal Reserve has made it clear that it is encouraging banks to use the program. The Federal Reserve believes that the BTFP can help to ensure that the financial system remains stable and that the economy continues to grow.

Thank you @marsden.

I should’ve named this the liquidity thread.

BTFD was established in the wake of several regional US banks that are in the news and I’m sure you know well, ad naseum.

I wasn’t around in 1998 for the LTCM liquidity event, so I will leave it to senior members of this forum to comment on it, but we’ve all read the books.

On LIQUIDITY. —- (not credit or solvency) i personally observe this strange (PUSH PULL) mechanism with the fed and treasury and g10 CB’s.

So, the treasury TGA & RRP facility offer liquidity as the fed attempts to suck liquidity out by QT & higher’er for longer rates?

The emergency LIQUIDITY seems to speed up things in a slowing liquidity cycle.

There’s other liquidity factors such as cross border liquidity. The BoJ’s Ueda seems to keep QQE & YCC policy of Kuroda in place. This flows to capital markets and US treasuries cross border.

PBOC’s regulations on cross border investment is lax and they are simultaneously injecting liquidity into their economies.

One thing to note. —- this is not addressing any credit or solvency crisis as we have not seen one happen yet.

On CB’s resolve to conquer inflation.

Liquidity seems to be preferred over inflation fighting mechanisms. As we observed the Bank Of England drop everything to float the pensions during a similar debacle early this year.

Things are breaking. And maybe by design? I don’t doubt the good intentions of CB’s during this process. That said, leading & lagging effects & pigs in a python and unforeseen events.


Ironically. Bitcoin and crypto in general have been good weekend gauges of sentiment and capital markets have been extremely resilient (I’m wondering if it’s in part due to liquidity by all other means not QE)


On one week’s end early March we see regional banks in turmoil & Credit Suisse CDS blowing out. And the next week promptly Lagarde hits EU with 50 bps.


So there’s a heroin & cocaine like effect.

Please stop me if I sound like an idiot. I am a trader. Not an economist.


Looking at MOVE index, bond market volatility (on the short end especially), we’re seeing 13 sigma daily moves. And yet markets are fine.

Banks are blowing up. What about hedge funds? Redemption? Commercial real estate?

Overall I’m watching CB’s inject the liquidity through the back door as things break.

I would love to discuss this as I’m the dumbest in the room.


FED FUNDS & SOFR futures curves are all over the place.

And we are just coasting along. The markets going into duration.

Trying to get a feel. Meanwhile we got 4 and change % in cash, t bills, and money markets.


Interesting times. Is it 1998?

I would love to discuss this as I’m the dumbest in the room.

I might challenge you for that title, because I'm just a dabbler in all this.
From my perspective, the recent bank troubles and the 2007-8 financial collapse were both strongly related to the differences between book value and market value. LTCM, from what I have seen, was largely just a matter of idiocy unchecked.
In the financial collapse -- and I'll probably get this not quite right -- accounting changes requiring that market value rather than book value be used for certain things forced a lot of market actors into selling assets when the rosy scenarios under which they had been bought -- mostly that real estate always goes up in value -- proved to be false, and these forced sales cascaded through markets and economies.
In the "recent unpleasantness," interest rates had gone up so much, relatively (easy to do when you start near zero), that market values were significantly less than book values. This wouldn't matter too much on its face, because banks generally use book value to meet their reserving requirements.
However, add some clever people to the mix who realize that one bank or another's assets are seriously overvalued, and that you should take all your deposits out of them because if people ... take all their deposits out of them ... they will face failure. And that's what happened; absent the creation event of the clever people realizing that this could be a problem it probably would not have been much of a problem, but that's not the world we found ourselves in.
The Federal Reserve (not sure about other central banks), in addition to its well-known ammunition of changing federal funds rates, has some nuclear weapons stored in its basement that it is loath to use (they're NUCLEAR weapons, after all!). These are the reserve requirements.
It has seemed to me that, first of all, it would make sense to use market value essentially always; book value is an accounting fiction the day after it is first recorded, and you're inviting chaos by relying on it too heavily -- there will always be clever people willing to note when the fiction has left the realm of plausibility.
Secondly, the problem with market value is that in distress situations the actors depending upon it become price makers rather than price takers, and you have massive contagion of what might be minor problems.
So what might be done instead of emergency lending provisions is that the Fed could temporarily and in otherwise limited situations reduce reserving requirements, so that a bank -- or maybe the entire banking industry -- is given a few months to address reserve problems rather than having fire sales. Probably it would be a good idea to raise general reserve requirements so that there's a little breathing room to lower the requirements before entering into the realms of implausible fiction, but that's not an insurmountable issue.

If SVB had held it’s already considerable regulatory-mandated liquidity in a form with lower market risk – say UST FRNs - well, they certainly wouldn’t have earned anything on it, but then any asset fire sale wouldn’t be traumatic. I am a believer in more or less forcing the smaller firms to hedge market risk out of their liquidity portfolios. Use of asset swaps is clumsy and consumes valuable credit lines. FRNs are the ticket imho.  

If SVB had held it’s already considerable regulatory-mandated liquidity in a form with lower market risk – say UST FRNs - well, they certainly wouldn’t have earned anything on it, but then any asset fire sale wouldn’t be traumatic. I am a believer in more or less forcing the smaller firms to hedge market risk out of their liquidity portfolios. Use of asset swaps is clumsy and consumes valuable credit lines. FRNs are the way to go imho, Other views?

Not intending to hijack your thread here, so just ignore if not interesting.

About a decade ago an enterprising Bank of Montreal economist did some interesting work and ascertained that about half of both the domestic assets and liabilities (we’re mostly talking about retail mortgages and deposits) of the large Canadian banks are in one form or another government guaranteed.  The trend at the time of writing was towards more government guarantees. This research caused people in Canadian financial markets think a great deal about what risk then means from a system perspective. Among other things, it made some people opine that bankers should be half-paid as bureaucrats instead of paying themselves as much as they do. Shudder!
 
Has anyone got a comparable number for the proportion of the US bank domestic assets and liabilities that are guaranteed by government? The number will likely shock. What does this mean from a system risk perspective? SVB issued government insured deposits (not enough apparently!) but probably held no government-insured assets apart from bonds that unfortunately have market risk. 

Not intending to hijack your thread here, so just ignore if not interesting.

About a decade ago an enterprising Bank of Montreal economist did some interesting work and ascertained that about half of both the domestic assets and liabilities (we’re mostly talking about retail mortgages and deposits) of the large Canadian banks are in one form or another government guaranteed.  The trend at the time of writing was towards more government guarantees. This research caused people in Canadian financial markets think a great deal about what risk then means from a system perspective. Among other things, it made some people opine that bankers should be half-paid as bureaucrats instead of paying themselves as much as they do. Shudder!
 
Has anyone got a comparable number for the proportion of the US bank domestic assets and liabilities that are guaranteed by government? The number will likely shock. What does this mean from a system risk perspective? SVB issued government insured deposits (not enough apparently!) but probably held no government-insured assets apart from bonds that unfortunately have market risk. 

Has anyone got a comparable number for the proportion of the US bank domestic assets and liabilities that are guaranteed by government?

Well, Bard says, "As of December 31, 2022, the proportion of US bank domestic assets and liabilities that are guaranteed by the government is approximately 10%."

And if you believe that, I'd like to discuss some business opportunities with you.

I just realized I had been using the BTFD anagram as a typo for BTFP, sorry, when I type these things out I do it on my phone and often quite thoughtlessly.

Listen friends. I’m reading your responses and they are fantastic. I’m wondering if I should inject my opinion here, or just let this thread be open to more comments.

Screw it!

I’ll inject my opinion here.

But first —- an brief introduction


I am so sorry for not responding these past days, as I’ve been busy with work, family, side businesses, and other jobs that occupy my time.

I want to tell everyone posting here it’s fabulous to have your valuable insights. And NO ONE here is hijacking the thread, because it’s an open discussion among like minded people.

I welcome all your input!

I think I mentioned this earlier and do not wish to throw cold water on this. I’ve never been a great academic or student, nor have I been an economics wizard.

Therefore, I do feel comfortable saying I’m the dumbest person in the room here and I like that designation, it’s a learning space not an ego space.


I can only share my observations of weeks passed.

I am only a humble trader so please take my observations with a grain of salt.

I am prepared and I know personally my own stress tests. I am solid and I’m ok with not being rockstar in 2023.


That said, I love macro and to discuss what is often a higher level discussion on the economy.

So, here’s my crude observations and not predictions.

And please correct me if I’m wrong.

———





We have an inverted yield curve right now, as opposed to a DEEPLY inverted yield curve last month, which is likely a function of raising the fed funds and overnight rates to even the 2 year which is normalizing over the week past.

The month of March saw much more actualized volatility than implied.

I think the story of March can be observed in the yield curve itself.

Why is the yield curve inverted? Perhaps, it’s manner in which they are doing QT?

Is it because the fed is reducing its balance sheet of assets during QT on the shorter duration assets first so that when it’s brought to market it’s bid with higher yield, as the investors are demanding higher yields in a higher inflation (by PCE / CPI measurements)?

Then over time the long end duration yields are below that front end and we have a downward sloping yield curve.



If you can visualize the yield curve today it’s higher on the short end is lower the further out in duration. 10-30+ years.


Then there’s a bank curve.

That’s the banks’ ideal yield curve. Looks like a ramp up, not ramp down. It’s NOT inverted, because banks make money by borrowing short term at lower rates and lend long term at higher rates.

This function of the SVB bank being so deeply under water their long duration book, due to monetary policy coupled with the above conditions made then incur paper losses.

From what I understand of the regulations. The long duration book of SVB were not marked to market, therefore SVB by law couldn’t hedge interest rates with derivatives.

Some VC and activists that had large deposits in the SVB bank shouted fire in a crowded theatre.

The result was a deposit outflow in panic which was probably not really necessary.


Like I said had SVB held their long debt to maturation there would be no principal loss. However, they weren’t making money on the spread which is how banks like to make it.

Deposítese fleed in panic. It seems like the BTFP & other liquidity measures have fixed this problem.


There’s been some yield curve movements this week that suggest that a normalizing of inversion on the yield curve is happening.


I don’t want to shout QE in a tightening theatre.

But the ultra long duration assets are getting flows.

How will the fed proceed with QT moving forward?


We’ve seen some big moves in commodities lower. Disinflation currents.

Housing affordability is a bizarre one because it’s regional and multi factorial.

That said. The MOVE index has given relief & the VIX as well.

Could it be Quarterly whale OPEX gamma pin into Friday?


Perhaps.


But my gut tells me over the weekend the treasury & the fed are going to be burning the candle at both ends looking to fix this issue.


I think it’s prudent not to be a hero, just remain humble and let markets be random as Paul W always touts.


That said, I’m not so pessimistic.


When things are so PUBLIC, I tend to be a bit skeptical.

I think Deutchebank is VERY public.
I think depositors fleeing to money markets & tbills is very public
I think yield curve inversión is very PUBLIC.
I think all of the stress in CRE & the economy and financials are very PUBLIC.


and I’m not going to make any bold calls here. I’m just going to say, being very public is just damn PUBLIC!

All I know is, I’m positioned is safe. And I think there’s always opportunities and I’m just relaxing 2023. I’m wondering if I should go back to school, and this time do education better, because of my authority problems I screwed up my youth.


Be aware. I’ve never seen a risk free rate above 0 ish in my career. And I have a lot to learn from my elders and peers.

Here is the opportunity to inject a bunch of maths, charts, graphs, quantitative data, qualitative analysis and a narrative.


And I won’t do it.

Like I said. Everything public is public.

BTFP has been termed, “a temporary program”

All governments implement “temporary programs” that typically end up very permanent fixtures.

I think credit & solvency are much bigger issues.

As for inflation, I generally don’t like to discuss it, because it’s a monetary phenomena and there are structural issues, demography changes, technology disruptions, aging workforces, supply chain geopolitics, and other issues that affect consumer products.


As for the consumers —- I think they’ll be ok. There’s demand destruction, recession fears, complete terror in the financial media.

Is it warranted? I tend to look at liquidity here. It’s not just BTFP, there are many other drivers of liquidity and I’ve said it before, observe the Bank of England.


They have much higher & stickier than inflation than the G7.

They go straight to liquidity when pensions have problems.

So, it’s not QE. It’s just flows.


The fear mongers are public.

Statistics are flawed.
JOLTS, PCE, ISM, PPI, CPI, etc.

I watch each data point and I’m less and concerned over each data point.


I do think at some point the delta rate of change of inflation, however you measure it will plateau at some point.

Corporate earnings expectations are high, but they get adjusted and typically this more liquidity & flows driven model than did XYZ have a good quarter in a quasi banking crisis’ quarter?

Or is it long term? Duration and looking 30+ years ahead at AI, disruptive tech, etc.

I hate the narratives & predictions. I just call those assets, zero debt ultra duration bond proxies.


They have done well and markets are resilient.

Market internals and various Sectors are more resilient than I would’ve believed.

The global economy is too complex and capital markets, not just the US, but internationally are holding up fine.

Are there risks on the horizon? There always are! And that’s where the great opportunities are.


We’ll make money —- and survive.

And anectdotally, I’ve been spending a lot of money. I have bills, children, toys they need, energy to expend, travel to do, housing to maintain.

I’m always spending! I’m saving too. But I’m spending and I go to the mall in many major cities worldwide. I see people on lines to get to consumer products. .

Last year retailers had a glut of inventory they sold off at liquidation prices.

I don’t love the banking sector, due to the yield curve, but that’s where the talent is and I’m sure there’s an accommodative side of these CB’s that isn’t written about in doom porn.

Meanwhile, I try to go to the Apple Store. It’s packed.


Quality Jobs are being culled from those big mega caps. That said, my plumber and roofers never made as much money as they did this year. And when you need a plumber you need a plumber!

Healthcare same.

Materials and infrastructure?

Our govt’s are going spend like it’s a fiscal orgy, because that’s what they do! And it’s also an election cycle coming up in US, I don’t expect the Great Depression because everyone needs to get re-elected to congress & their posts in whatever swamp they work in.

Money flows.

The CB’s are politically entities at the end of the day.


Will we have 150 VIX puke in the bucket moment this year? I doubt it, due to so many institutions know the deal and have HEDGED accordingly.

Will there be more things to break? Sure. And more emergency liquidity facilities will come & claim to be temporary but will probably be permanent.

This is the economy.

I’ll be ok.

Life will go on.


My 2 cents.

Looking just now at the US Treasury yield curve, I see 1 month rates of 4.74%, creeping up to peak at 4.97% at 4 months, then trailing down to 3.48% at 10 years, 3.81% at 20 years, and 3.67% at 30 years. And this general pattern -- high-ish immediate rate picking up for a few months and then dropping off -- has been holding for the entire month.

Frankly, this is just stupid: the bond market is stupid.

Why?

The Federal Reserve's target inflation rate is 2.00%. If we assume that they reach that (it's currently looking like we're around 3.6%) and that things look fairly stable at that level, then what are reasonable interest rates? Immediate rates might fall to around 3%: inflation plus a little sweetener.

If longer term debt is competing with cash, the longer term debt will be subject to risk that cash -- getting immediate rates -- isn't: if inflation creeps up, so should immediate rates. Now, inflation could creep down, too, but the value of longer term debt -- assuming no negative interest rates -- is capped at 100% of final payment amount. In the near term, this means there's not much upside -- not much room between $95 price and $100 final payment -- but plenty of downside. So there should be a rising yield curve for near terms ... barring some inorganic expectation (such as, legitimately, we probably have now) that rates will be falling in the near future.

In an ideal world, yields should increase as long as there is more downside than upside, but then where the magic present value of 50% of final payment amount is reached, there starts to be more upside than downside, so absent inorganic considerations, yields should fall off beyond that point.

But still, they should be consistent with an expectation of inflation stable around 2.00% (... and immediate interest rates stable over time at around 3.00%) ... which I wouldn't in a million years say the current long-term rates are. And again, there are limits: inflation is usually never negative, so a 5% jump from 2% in the inflation rate is very possible, but a 5% drop is awfully unlikely.

Maybe there's some very significant inorganic considerations at work: an expectation of a brutal recession and deflation?

I think a lot of current actors in the market got hypnotized by the long span of time that inflation and interest rates remained close to zero, and regarded this as the new normal; SVB apparently did exactly that. But recent history is definitely not normal: I cut my teeth using 8% interest as the default assumption, and while this was on the high side due to coming out of the inflationary periods of the late 1970s and the 1980s, still, near zero inflation and interest rates are an anomaly.

So, someone tell me why it's me and not the bond markets that is stupid.

Look. The idea that the bond market is the “smart money” is a fallacy. It’s just different maths.

Im more of a tourist. A macro tourist. And we have leeway on what products and markets we can put money to work in.

The bond market is a strong indicator. But its the most Schitzophrenic market I’ve ever seen.

The fed will never reach 2% inflation target on (their favorite indicators PCE) without a depression.

The bond market has blown up.

I can’t tell you how many Hedge funds I knew that were short Eurodollar STIR SOFR futures for December 2024.

This makes a lot of sense why we saw a 12 sigma move in a day on the 2 year —-

So many funds were positioned short 2s and the STIR (short term interest rates) through various products.

That’s why the MOVE index exploded above 150.


Look. I’m not saying we will avoid a recession here. I’m not saying the fed will pivot, nor if they do will it be a good thing for capital markets?


I’m not the fed whisperer.


I knew a couple of PhD’s that worked at high level jobs at the fed that became hedge fund STIR traders and blew themselves up being over confident.


What I’m saying is.

I know my market moving size.

I am making 5% on cash and I’ve got collateral, and I’m a trader!

Like Paul Tudor Jones said, “I’m a trader!”


Im a trader too. And traders have to trade.


Is 2023 the toughest year? I honestly don’t know, for me personally, the first half really threw us for a loop.

That said. It’s a tradeable market considering you’re a good active manager, you understand your risk profile, you know how to position with correct size, you follow liquidity markers short term, you watch the data points as they come, and you know when to exit early.


You don’t have to be a rockstar in 2023.

we got a guaranteed 5%. I’m a trader. Know thyself.


This isn’t easy. If everyone who played basketball was Michael Jordan it would still be hard.

It’s not easy to be Michael Jordan even if you’re born with natural talent.

This market is tough. If you have a sense of humor about it and can ride volatility out.

If you protect your funds.

you can play around.


You win some and lose some.

I think Druckenmiller or Soros said something like, “it’s not about if you’re wrong or right. It’s about how much money you lose when you’re wrong and how much money you make when you’re right!”


I probably screwed that quote up.

I know this year will be tough worldwide. But some will do very well. But they need to be flexible and not married to a narrative.

On a given day next week we can have a circuit breaker moment.

Is it probable? Let’s say this. Given the macro conditions and the CB’s positions, the probability is very high you can blow up.

That’s why I say, 2023 could be the year of Tbill and chill and play a little poker if you want.

Just don’t get married to a narrative

CTAs and HEDGEFUNDS will blow up.

More banks may blow up.

The jobs story? I think that’s more of a 2024 story. Where the lag shows.


At the end of the day. The crisis results in the long term, if you ignore the noise.

I’m a trader.


If I were a fund of funds like Bridgewater or long/short, or even a quant ML style fund. I would be careful. I think 5% is fine in a bad year.

Even Renaissance capital medallion fund had 2% years and they had a lot of PhD’s working too hard.

Imagine your worst year is 5% in t bills? I think you can chill out. Because the opportunity clearly is in the waiting here.

If you’re a fund of funds moving around 100 billion or more —yeah, I think if you explain to LP’s you’re in the fund because you know that the big money is in the waiting, and knowing when to act and when to pause is why they invest with you, then you can float this year without redemptions.


Will there be a recession? It’s a random walk!


I just know we’re not going to blow up and we’ll survive.