Emergenza incendi: contenere l'incendio senza spegnerlo

Non intendiamo aggiungere anche le nostre parole al caotico bla-bla dei media: ciò che c’era da evidenziare, da sottolineare ed analizzare noi di Recce’d lo abbiamo già fatto, con settimane e mesi di anticipo.

Troppo anticipo? Lasciamo a voi di giudicare. Il nostro giudizio è che è un grande valore, nelle fasi in cui i mercati vanno nel panico, avere chiarissima la situazione sottostante.

La situazione delle economie reali, della geopolitica internazionale, in sostanza della realtà del Mondo, oggi si presenta esattamente come noi di Recce’d vi avevamo anticipato 12 mesi fa. Non la BCE, non la Federal Reserve, non Trump, non Lagarde: noi siamo tra i pochi che nel corso del 2020 non sono stati costretti a cambiare visione, previsioni, lettura della realtà.

Detto questo, i mercati ad oggi sono andati in un’altra direzione? E’ una cosa seria, ma non grave, come scriveva lo scrittore Ennio Flaiano.

Non staremo qui a ricordarvi gli episodi precedenti: voi li conoscete, noi li abbiamo già messi in evidenza.

Risulta però utile, se volete essere coscienti di ciò che accade intorno a voi, e consapevoli di ciò che si vede nei vostri portafogli, leggere con attenzione un documento pubblicato in settimana dalla Banca dei Regolamenti Internazionali.

La BRI è un Istituto che opera da Basilea, ed è la Banca Centrale delle Banche Centrali. Non ha però poteri diretti di intervento (non può andare direttamente a cambiare le decisioni delle singole Banche Centrali) ma esercita un potere di influenza emettendo pareri come quello che leggete qui sotto.

Il punto che noi vi abbiamo messo in evidenza vi aiuta a comprendere tutto ciò che vedete sui mercati oggi, e tutto ciò che avete visto sui mercati negli ultimi quattro mesi.

La decisione della Federal Reserve si riprendere con il QE, ovvero con le mensili immissioni di liquidità sui mercati finanziari nel settembre dell’anno scorso, fu una decisione di emergenza, e la motivazione autentica di quella decisione fu quella che spiega qui sotto la BRI.

A fine settembre più operatori stavano per “saltare”. Questi operatori facevano parte della categoria Fondi Hedge. Le loro operazioni a rischio avevano come contropartita le banche commerciali. Siamo stati ad un passo da una situazione identica al 2008. E la situazione non è risolta: le operazioni di finanziamento di emergenza della Federal Reserve proseguono anche adesso, anche oggi, ed ogni giorno.

Sul ruolo svolto dalle diverse parti in causa, e sulla compatibilità di questo ruolo con le loro responsabilità, lasciamo ai lettori di fare le valutazioni che ritengono. Noi vi lasciamo alla lettura di questo autorevole lavoro di analisi.

September stress in dollar repo markets: passing or structural?

BIS Quarterly Review  |  December 2019  |  08 December 2019

by  Fernando Avalos, Torsten Ehlers and Egemen Eren

The mid-September tensions in the US dollar market for repurchase agreements (repos) were highly unusual. Repo rates typically fluctuate in an intraday range of 10 basis points, or at most 20 basis points. On 17 September, the secured overnight funding rate (SOFR) - the new, repo market-based, US dollar overnight reference rate - more than doubled, and the intraday range jumped to about 700 basis points. Intraday volatility in the federal funds rate was also unusually high. The reasons for this dislocation have been extensively debated; explanations include a due date for US corporate taxes and a large settlement of US Treasury securities. Yet none of these temporary factors can fully explain the exceptional jump in repo rates.

This box focuses on the distribution of liquid assets in the US banking system and how it became an underlying structural factor that could have amplified the repo rate reaction. US repo markets currently rely heavily on four banks as marginal lenders. As the composition of their liquid assets became more skewed towards US Treasuries, their ability to supply funding at short notice in repo markets was diminished. At the same time, increased demand for funding from leveraged financial institutions (eg hedge funds) via Treasury repos appears to have compounded the strains of the temporary factors. Finally, the stress may have been amplified in part by hysteresis effects brought about by a long period of abundant reserves, owing to the Federal Reserve's large-scale asset purchases.

A repo transaction is a short-term (usually overnight) collateralised loan, in which the borrower (of cash) sells a security (typically government bonds as collateral) to the lender, with a commitment to buy it back later at the same price plus interest. Repo markets redistribute liquidity between financial institutions: not only banks (as is the case with the federal funds market), but also insurance companies, asset managers, money market funds and other institutional investors. In so doing, they help other financial markets to function smoothly. Thus, any sustained disruption in this market, with daily turnover in the US market of about $1 trillion, could quickly ripple through the financial system. The freezing-up of repo markets in late 2008 was one of the most damaging aspects of the Great Financial Crisis (GFC).

The liquid asset holdings of US banks and their composition have changed significantly since the GFC. Successive rounds of large-scale asset purchases reduced the free float of long-dated US Treasuries available to the market between the end of 2008 and October 2014. On the flip side, banks accumulated large amounts of reserve balances remunerated at the Fed's interest on excess reserves (IOER) (Graph A.1, left-hand panel, red line). After the Federal Reserve started to run down its balance sheet in October 2017, reserves contracted, quickly but in an orderly way as intended. Alongside, banks' holdings of US Treasuries increased, almost trebling between end-2013 and the second quarter of 2019 (blue line).

As repo rates started to increase above the IOER from mid-2018 owing to the large issuance of Treasuries, a remarkable shift took place: the US banking system as a whole, hitherto a net provider of collateral, became a net provider of funds to repo markets. The four largest US banks specifically turned into key players: their net lending position (reverse repo assets minus repo liabilities) increased quickly, reaching about $300 billion at end-June 2019 (Graph A.1, centre panel, red bars). At the same time, the next largest 25 banks reduced their demand for repo funding, turning the net repo position of the banking sector positive (centre panel, dashed line). The big four banks appear to have turned into the marginal lender, possibly as other banks do not have the scale and non-bank cash suppliers such as money market funds (MMFs) hit exposure limits (see below).

Concurrent with the growing role of the largest four banks in the repo market, their liquid asset holdings have become increasingly skewed towards US Treasuries, much more so than for the other, smaller banks (Graph A.1, right-hand panel). As of the second quarter of 2019, the big four banks alone accounted for more than 50% of the total Treasury securities held by banks in the United States - the largest 30 banks held about 90% (Graph A.2, left-hand panel). At the same time, the four largest banks held only about 25% of reserves (ie funding that they could supply at short notice in repo markets).

Cash balances held by the US Treasury in its Federal Reserve account (the Treasury General Account, TGA) grew in size and became more volatile, especially after 2015. The resulting drain and swings in reserves are likely to have reduced the cash buffers of the big four banks and their willingness to lend into the repo market. After the debt ceiling was suspended in early August 2019, the US Treasury quickly set out to rebuild its dwindling cash balances, draining more than $120 billion of reserves in the 30 days between 14 August and 17 September alone, and half of this amount in the last week of that period. By comparison, while the Federal Reserve runoff removed about five times this amount, it did so over almost two years (Graph A.2, centre panel).

Besides these shifts in market structure and balance sheet composition, other factors may help to explain why banks did not lend into the repo market, despite attractive profit opportunities. A reduction in money market activity is a natural by-product of central bank balance sheet expansion. If it persists for a prolonged period, it may result in hysteresis effects that hamper market functioning. For instance, the internal processes and knowledge that banks need to ensure prompt and smooth market operations may start to decay. This could take the form of staff inexperience and fewer market-makers, slowing internal processes. Moreover, for regulatory requirements - the liquidity coverage ratio - reserves and Treasuries are high-quality liquid assets (HQLA) of equivalent standing. But in practice, especially when managing internal intraday liquidity needs, banks prefer to keep reserves for their superior availability.

Shifts in repo borrowing and lending by non-bank participants may have also played a role in the repo rate spike. Market commentary suggests that, in preceding quarters, leveraged players (eg hedge funds) were increasing their demand for Treasury repos to fund arbitrage trades between cash bonds and derivatives. Since 2017, MMFs have been lending to a broader range of repo counterparties, including hedge funds, potentially obtaining higher returns. These transactions are cleared by the Fixed Income Clearing Corporation (FICC), with a dealer sponsor (usually a bank or broker-dealer) taking on the credit risk. The resulting remarkable rise in FICC-cleared repos indirectly connected these players. During September, however, quantities dropped and rates rose, suggesting a reluctance, also on the part of MMFs, to lend into these markets (Graph A.2, right-hand panel). Market intelligence suggests MMFs were concerned by potential large redemptions given strong prior inflows. Counterparty exposure limits may have contributed to the drop in quantities, as these repos now account for almost 20% of the total provided by MMFs.

Since 17 September, the Federal Reserve has taken various measures to supply more reserves and alleviate repo market pressures. These operations were expanded in scope to term repos (of two to six weeks) and increased in size and time horizon (at least through January 2020). The Federal Reserve further announced on 11 October the purchase of Treasury bills at an initial pace of $60 billion per month to offset the increase in non-reserve liabilities (eg the TGA). These ongoing operations have calmed markets.

NOTES On the same day, the effective federal funds rate increased only 5 basis points to 2.30% (above the upper limit of the federal funds target), but the intraday range spiked to almost 200 basis points, from a typical range of less than 10 basis points.  J Williams, "Money markets and the federal funds rate: the path forward", speech 332, Federal Reserve Bank of New York, 17 October 2019.  Concerns about market functioning due to depressed interbank trading activity in an abundant reserves regime were an important consideration behind Central Bank of Norway's switch to a quota-based system in 2011.  Markets Committee, Large central bank balance sheets and market functioning, no 11, October 2019.  See I Aldasoro, T Ehlers and E Eren, "Can CCPs reduce repo market inefficiencies?", BIS Quarterly Review, December 2017, pp 13-14.  On 18-20 September, it offered overnight repos to primary dealers of up to an aggregate amount of $75 billion against Treasury, agency debt and agency mortgage-backed securities collateral. From 15 November, at least $120 billion in daily overnight repos, in addition to at least $35 billion in two-week term repos, was offered twice a week and at least $15 billion for four- or six-week repos was offered weekly.