Thanks Pat, good report.
Yes, the Fed knows the assets won’t go away, and all they want is to see funding spreads narrow to help insure the banks aren’t forced to sell due to funding issues and thereby distort prices beyond prudent repricing of risk.
TAF auction (20bb) results announcement will come out tomorrow Wednesday 12/19 at 10:30am. Results of the program have had limited impact on repo rates but have reduced Libor rates by 20bps.Turn levels from Bank of America
UST GC= 2.80 / 2.40
AGCY MBS = 5.15
The problem with funding balance sheets hasn’t disappeared. The TAF and The Treasuries TTL programs have simply reduced the cost of funding but have not, and cannot, make an impact on balance sheet size or composition problems. Balance sheets are bloated with ABCP/ CLO / CDO / Enhanced Cash / Structured ABS / etc….
A quick survey of 4 dealers illustrates how balance sheet pressures and the liquidity of balance sheets have affected the bid for repo collateral. Usually dealers across the maturities dealers are within 5bps of each other. Currently the dispersion of bids is very wide.
At the same time we are finding dealers with balance sheet to lend. It’s just the prices of cash vary by dealer and by term and depend on which banks have bought term liquidity and what term they bought it for.
| 1w | 1m | 3m | 6m | 9m | 1y | |
| MS | 4.50 | 4.75 | 4.55 | 4.36 | 4.15 | |
| Citi | 4.65 | 5.20 | 5.05 | 4.95 | 4.70 | 4.55 |
| CSFB | 4.45 | 4.90 | 4.80 | 4.70 | 4.60 | |
| BoA | 4.80 | 5.10 | 4.65 | 4.40 | 4.30 | 4.20 |
| Ave | 4.60 | 4.99 | 4.76 | 4.60 | 4.53 | 4.30 |
| Range | 0.35 | 0.45 | 0.50 | 0.59 | 0.40 | 0.40 |
The MBS spreads to LIBOR has narrowed as well. Agcy MBS had been trading as much as L-50 for 3m and longer terms. Now we are close to L-20. This seems to be a result of the TAF and CBK liquidity programs providing cheaper funds along the curve and reflects a relative downward move in LIBOR rates as the MBS and OIS markets are essentially unchanged from a week ago.
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