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JGB TECHS

(U1) Tilted Higher

AUSSIE 10-YEAR TECHS

(U1) Uptrend Weakening

US TSYS SUMMARY

Bullard Kickstarts Reflation Unwind Theme

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Fresh 2021 Lows

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Credit Suisse's Zoltan Pozsar has noted that he doesn't "see the need for an IOR hike (from the Fed) this year; we think the market is wrong."

  • "There is an important part of the fed funds market that is currently dormant, which is the portion that's driven not by the size of Federal Home Loan Banks' (FHLB) liquidity portfolios, but by FHLBs' o/n arbitrage books. Historically, the FHLBs have been issuing o/n discount notes to arb the higher of EFFR or Tri-Party General Collateral Rate (TGCR). There is one bit of anecdote that we hear from a number of FHLBs, which is that even though FHLBs could easily raise o/n funds at 1/10th of a basis point (via o/n discount notes), they have no interest to do so, as foreign banks have no appetite to borrow more in the o/n fed funds market. Even a marginal increase in lending would simply "crater" the price of the marginal fed funds trade, so why do it? Implicit in this phenomenon is that relative to the 2015-17 period, the fed funds market went through a transformational shift: back then it was all about arb, whereby foreign banks borrowed to harvest the IOR-EFFR spread, whereas today, the foreign bank bid is about harvesting the liquidity value of o/n fed funds (booked as quasi-official sector deposits) for their LCR benefit. You can see this behavioral shift in two ways: at quarter-ends, fed funds volumes decline less than during 2015-17, while at month-ends, EFFR drops much less."
  • "The current 6bp effective fed funds rate (EFFR) prints are driven by some FHLBs getting hit with community banks paying back their advances at the most recent month-end. The extra cash from paydowns is being lent in the fed funds market temporarily. When that extra cash leaves FHLBs' hands (as term discount notes mature), EFFR will tick back up to 7bp again. That is to say that EFFR trading at 6 bps has "micro" as opposed to "macro" drivers. This, plus the fact that FHLBs' risk departments are flooring EFFR at 4bp and demand for fed funds is LCR driven, will keep EFFR above 5bp."