fejau
@fejau_inc • 69,525 subscribers
Shitposts, macro, crypto. Host of podcast & newsletter @forwardguidance
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Does QE looks good here? Let's talk. Fed Collins is making the rounds this morning after a piece in FT hinted at intervention in treasury markets if need be is something they're thinking about. First, let's diagnose what causes the Fed to intervene for financial stability typically. 1) Funding market issues: If there's strain in funding markets, September 2019 Repo blowup being an example, the Fed will provide liquidity through repo facilities and short term loans to alleviate this. This week we have seen some strain in funding markets but nothing major yet and if there was, the Standing Repo Facility is now a permanent thing available if required. So the problem is pre-solved there. 2) On the longer end of the curve, the Fed intervenes if trade activity on illiquid long bonds seizes up. Long bonds (duration of 10yrs+) are available in two flavors: On the Run - the most recently issued bonds which trade roughly at par and are the most illiquid Off the Run - any other bond of a maturity that exists that isn't of most recent issuance. These are illiquid as depending on their YTM they trade at either a premium or discount to par and there's very little liquidity around these. A lot of the activity is OTC. A major marginal buyer of off the runs is hedge funds that deploy basis trades - they buy off the runs and will short the related future and capture the spread as a delta neutral yield. As well, Treasury is actively doing buybacks to improve the liquidity of these off the runs - they will buy up the off the runs and issue a roughly duration matched on the run to remain somewhat duration equivalent. If they do something like issuing bills and buying illiquid off the run bonds, you could argue this is a version of duration management similar to what the Fed does with operation twists. During March 2020, the Fed intervened in treasury markets with fervor because this off the run market seized up and went no bid. They had to be the buyer of last resort. So far, during this market crash, liquidity in funding markets and off the runs has been mostly okay. Some jitters, but surviving. The big issue at hand is global capital is getting out of US denominated assets and wants to go home. This is why we are seeing yields go higher and the DXY lower. Capital is leaving. As yields surge, and liquidity remains sorta okay, the main impact is increased yields and therefore increased borrowing costs for things associated with long bonds such as 30y mortgages. If this selling accelerates and begins to strain purely from a PnL basis and not a liquidity basis, the Fed has a difficult decision to make. Do they step in, perhaps temporarily, to be a buyer of these long end bonds? This is what the Bank of England did when the Gilt market went through a similar situation. It was temporary and they unwinded the buying quite quickly one things settled down. In the roundup clip below, I discuss how a paper at the recent Jackson Hole Fed symposium that was presented of how the Fed could copy what the BoE did could be the most plausible of outcomes here. Now, the issue is, this is mostly a political and moral hazard situation as opposed to one of financial stability. Should they step in and ensure rates don't meaningful surge past 5%? Over the past few years it appears that this is where the bond market strike price is. We will see what happens if/when we hit those levels again. I hope this helps provide some sober analysis of what's plausible here.
fejau152,086 views • 1 year ago
What is happening in crypto right now is a resolution of the dislocation between expectations and fair value since the election in November. This is something we discussed and warned on the roundup on November 16th and ever since price has been flat/down and there's no signs of an SBR which is very different vs the expectations that were baked in. It is because of this concern for a potential dislocation that I/we have been on defence ever since the election after being disgustingly bullish in the lead up to it. The good news is this post-election premium is now being unwound, especially in alts. The bad news is this is happening during a time of relative equity strength. As traders, it is crucial to understand that markets are forward looking and you always need to be comparing expectations baked in vs reality, and not headlines on a standalone basis. Anyway. I'm sad to see the state of things right now and hopefully not too many people were carried out here. I do think that now that a lot of this dislocation has been resolved that the worst is over, but that is dependent on a positive macro environment which I'm not sure of. Godspeed. Forward Guidance Quinn Thompson Tyler Neville
fejau133,808 views • 1 year ago
Stoked to be in Korea this week and hosting a fireside chat tomorrow at the Origin Summit!
fejau21,114 views • 9 months ago
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