Tag Archives: LIBOR

Thoughts on the fx swap lines data releases

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>   
>   (email exchange)
>   
>    On Thu, Dec 2, 2010 at 3:51 AM, Mike wrote:
>   
>   It seems it was around 7 trillion notional. Do you know the durations?
>   

No, haven’t read any details. I recall they were relative short but were extended maybe more than once.

>   
>   If they didn’t act would the entire fx market have come to a halt.
>   

Libor setting would have been higher for as long as the BBA kept the weaker banks in the basket.

>   
>   Given that this lending is unsecured, what happens if a foreign central bank doesn’t pay?
>   

The lender has no recourse and takes a loss.

>   
>   Are there any constraints on this lending?
>   

Just political. A nation can lend, spend, or toss down a rat hole any amount of it’s own currency it wants.

>   
>   Finally, would clearing all fx swaps have prevented the fx “run” if the fed had
>   backstopped the clearinghouses?
>   

Not sure which ‘run’ you are referring to?

But getting short a currency, spot or forward, means you are borrowing it, directly or indirectly, and none of the currencies in question are ever ‘quantity constrained’. What triggered the swap lines was the desire of the Fed to get libor settings lowered.

The large dollar borrowing funded by the Fed swap lines was done because foreign banks with presumed credit issues were bidding up libor and driving up the libor settings which was driving up home mortgage and other rate settings in the US. The Fed brought the rates down by facilitating lending at lower rates to those weaker credits via the ECB and other CB’s. (That would have been my last choice on how to get those US rates down, but that’s another story.)

Does this help?

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what is gong on with swap spreads this am?

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Fed also re opening swap lines to ECB – looks ready to do more unsecured dollar lending to them and maybe others.

They look to be doing what they did last time around to keep libor down – lend unsecured to bad credits. High risk but it does get rates down.

On Fri, Apr 30, 2010 at 12:23 PM, Jason wrote:

Confluence of events..


Month end bid for treasuries
Goldman stock down 14 and financial CDS wider creating some fears for financial sector
Greece flight to quality concerns going into the weekend

Fed to begin expanding the Term deposit facility which will remove excess cash and remove downward pressure on term LIBOR

LIBOR quoted for Monday as 35.375 / 35.5 +1

1y OIS-LIBOR 5 day chart:





Result

2y spreads leading the way wider +5 to 23.5

Still cheap though

Press Release
Release Date: April 30, 2010


For immediate release
The Federal Reserve Board has approved amendments to Regulation D (Reserve Requirements of Depository Institutions) authorizing the Reserve Banks to offer term deposits to institutions that are eligible to receive earnings on their balances at Reserve Banks. These amendments incorporate public comments on the proposed amendments to Regulation D that were announced on December 28, 2009.

Term deposits, which are deposits with specified maturity dates that are held by eligible institutions at Reserve Banks, will be offered through a Term Deposit Facility (TDF). Term deposits will be one of several tools that the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy. The development of the TDF is a matter of prudent planning and has no implication for the near-term conduct of monetary policy.

The amendments approved by the Board are a necessary step in the implementation of the TDF. As noted in the attached Federal Register notice, the Federal Reserve anticipates that it will conduct small-value offerings of term deposits under the TDF in coming months to ensure the effective operation of the TDF and to help eligible institutions to become familiar with the term-deposit program. More detailed information about the structure and operation of the TDF, including information on the steps necessary for eligible institutions to participate in the program, will be provided later.

The amendments will be effective 30 days after publication in the Federal Register, which is expected shortly.

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Bank Regulation and LIBOR

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Too big to fail should not mean restricted liquidity.

Hopefully they don’t use the liability side of banking for market discipline.

But as they don’t even know what a bank is and are in this way over their heads they might!

>   
>   (email exchange)
>   
>   On Tue, Apr 27, 2010 at 8:09 AM, Jason wrote:
>   
>   Possibly if the legislation succeeds in removing risk for those determining the setting…
>   
>   But one of the primary goals is to remove the lending subsidy provided by the TBTF
>   moniker
>   
>   If they firmly establish banks as no longer too big to fail, their short term credit ratings
>   could fall as far as tier 2 in some cases.
>   
>   Thus the average LIBOR setting may move higher just as their CP rates move higher.
>   
>   Also if they lose their ability to lend at lowest rates some of their businesses fall into
>   jeopardy (bank letters of credit, liquidity facilities for VRDNs etc)
>   

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BMA/LIBOR mids

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Closing at the tights of the day.

One of the only ways to hedge higher tax rates.

BMA/LIBOR mids

Start Term Frequency Gross Net MBA Fwd Hedge Cost Floor Wgt Cap Wgt
5.00 5.00 12 98.74% 90.56% -8.18% 3.996% 60.5 -62.6
5.00 10.00 12 102.13% 92.92% 4.032% -9.21% 65.1 -70.5
2.00 8.00 12 96.91% 86.52% 3.653% -10.40% 58.1 -58.4
7.00 8.00 12 103.55% 93.98% 4.087% -9.57% 66.9 -73.8
5.00 15.00 12 103.83% 93.02% 3.957% -10.81% 67.3 -74.5
10.00 10.00 12 107.48% 93.70% 3.931% -13.78% 72.2 -83.0
15.00 15.00 12 110.80% 90.35% 3.686% -20.45% 76.6 -90.8
20.00 10.00 12 112.13% 88.71% 3.637% -23.42% 78.4 -93.9
15.00 5.00 12 108.82% 90.67% 3.764% -18.15% 74.0 -86.1

Using cap and floor hedge ratios from existing trades:

5.00 5.00 12 98.74% 92.94% 3.996% -5.79% 33.0 -13.0
10.00 10.00 12 107.48% 99.11% 3.931% -8.37% 38.0 -24.0
1.00 15.00 4 99.80% 88.40% 3.637% -11.40% 20.0 -15.0

**1×15 including 12% rate hedge

Feb-26-09 Change from Feb-25-09 Change from Feb-19-09 Change from Dec-31-08
3M 77.37500 -1.12500 -0.62500 -10.12500
6M 79.75000 -1.25000 -0.75000 -9.25000
1Y 83.62500 -1.25000 -0.50000 -6.87500
2Y 86.12500 -1.25000 -0.50000 -5.37500
3Y 88.25000 -1.25000 -0.50000 -4.25000
4Y 90.12500 -1.25000 -0.50000 -3.37500
5Y 91.50000 -1.25000 -0.50000 -2.75000
6Y 92.43750 -1.12500 -0.37500 -2.56250
7Y 93.37500 -1.00000 -0.25000 -2.37500
8Y 94.00000 -1.08330 -0.33330 -2.41670
9Y 94.62500 -1.16670 -0.41670 -2.45830
10Y 95.25000 -1.25000 -0.50000 -2.50000
12Y 96.75000 -1.25000 -0.50000 -2.25000
15Y 98.5000 -1.25000 -0.50000 -2.50000
20Y 100.37500 -1.25000 -0.37500 -3.37500
25Y 101.62500 -1.18750 -0.43750 -3.75000
30Y 102.87500 -1.12500 -0.50000 -4.12500
40Y 103.87500 -1.37500 -0.50000 -4.3750


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AGY MBS UPDATE: 08/12/08

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On Tue, Aug 12, 2008 at 5:18 PM, Andrew wrote:

AGY MBS UPDATE: 08/12/08

General Themes:

  • Mortgages were weaker to dealer hedge ratios – versus CXLs they were down only -5cents
  • The small CXL daily price change masks what was a pretty bad performance for mortgages
  • Dealer OAS’s are back to the wides of last week – Lehman has FN5.5 LOAS at +90bps
  • What could help mortgages?
  • Asian buying returning
  • Capital raising by the GSE’s, (or capital injection by Tsy)
  • Reduced capital surplus guidelines from OFHEO
  • Convexity led rally in rates

not to mention investors recognizing value vs tsy’s, atraight agency paper, quality AAA corporates, libor, and other lower yielding paper


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Bloomberg: Fed can’t reduce LIBOR

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I could fix this in twenty minutes…

Money Market `Plagued’ by Libor That Fed Can’t Reduce

by Gavin Finch

(Bloomberg) A year after central banks started to pump trillions of dollars into the financial system to end a seizure in credit markets caused by subprime mortgages, cash is about as tight as it’s ever been.

The U.S. market for commercial paper, or short-term IOUs, backed by assets such as mortgages has shrunk 40 percent from its peak in July 2007. The amount borrowed in pounds between banks in the U.K. fell by 70 percent in June from a record in February 2007. The European Central Bank received $100 billion of bids for the $25 billion it offered to financial institutions on July 29, the most since the sales began in December.

Efforts by the Federal Reserve, ECB and Swiss National Bank to shore up the world’s biggest banks and promote lending have had limited success.

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Re: Fed study on TAF

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>    
>    On Tue, Jul 29, 2008 at 4:05 AM, Andrea wrote:
>    
>    In case you haven’t seen this yet: A Fed study that finds that
>    Taf has lowered Libor.
>    
>    http://www.newyorkfed.org/research/staff_reports/sr335.html
>    
>    

right, thanks, as if they needed to fund a study to figure that out!

It’s like doing a study that shows the repo rate goes down when the fed lowers its ‘stop’ on repo.

(Too bad they didn’t use this study to show they should set a rate for the TAF and let quantity float, instead of setting a quantity and having an auction.)

It’s this kind of expense that gives govt. a govt. spending negative connotation.

all the best!

warren


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Fed Paper: “The Effect of the Term Auction Facility on the London Inter-Bank Offered Rate”

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Hardly need a study to figure that out!

This paper from the NY Fed was just released:

The Effect of the Term Auction Facility on the London Inter-Bank Offered Rate

Summary: This paper examines the effects of the Federal Reserve’s Term Auction

Facility (TAF) on the London Inter-Bank Offered Rate (LIBOR). The particular question investigated is whether the announcements and operations of the TAF are associated with downward shifts of the LIBOR; such an association would provide one indication of the efficacy of the TAF in mitigating liquidity problems in the interbank funding market. The empirical results suggest that the TAF has helped to ease strains in this market.


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Yellen the Dove on inflation

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“Inflation is a problem,” she said. Yet the problem isn’t excessive demand, rising wages, or a tight labor market, but “negative supply shocks.” Once the shocks wear off, the inflation rate can’t be sustained in the long run without a pick-up in wage growth, she said.

“There’s no textbook answer to what monetary policy should be doing at this time,” Yellen added.

Yes, there is – the mainstream says quite clearly ‘don’t add to demand during a negative supply shock. Or a triple negative supply shock. That will monetize the price increases and turn a relative value story into an inflation story.’

The FF rate is now below the year over year headline and core CPI; so, it’s easy for the Fed to now make the case the ‘real rate’ is negative and cutting it any could adversely alter long term employment and growth given the balance of risks between market functioning, inflation, and the output gap.

They also think they know that if markets are expecting a 25 basis point cut they need to do less than that to get a positive inflation response.

And, as before, they need to set a rate for the TAF and accept any bank legal collateral to be able to more effectively target LIBOR as desired.

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