Hi Ben, appreciate your work, keep it up. As someone who works in the rates market, your description here of the macro reaction in the aftermath of this week’s Fed meeting is a bit inaccurate. The spike in yields on the front end of the curve isn’t explained by the Fed increasing IOER and RRP facility rates by 5bps. The main reason we saw 2-5y yields come up significantly was the hawkish dot plot that projected two median hikes in 2023 (up from zero at the last Fed meeting) followed by James Bullard’s interview with CNBC Friday morning that was even more hawkish, talking about a potential rate hike in 2022. This triggered a rapid unwinding of 2s10s and 5s30s steepener trades from large hedge funds, and that unwind caused a major bear flattener on the yield curve with the short end coming up significantly and 10-30y yields falling. This positioning signals that the rates market is preparing for a tighter monetary environment sooner than previously expected.
It’s true that the RRP facility spiked to an insane $750bn after they adjusted the rate to 5bps, however it was already north of $500bn before the meeting. It’s not true that the Fed exchanges these overnight reserves for short term treasuries and it’s not true that this is what’s affected short end yields. The growth in the RRP facility has been often tweeted about by many lately as a sort of ominous sign of an incoming crash, but it’s not clear that that’s the case. Bank’s reserve ratios are still at zero since covid, so banks aren’t lending to other banks overnight at the effective to balance out reserve requirements, and with the steep recent drawdown of the Treasury General Account putting a lot of downward pressure on overnight and short term yields, it just makes sense for banks to park excess liquidity at the Fed. The surge in RRP certainly is a sign of a massive and potentially dangerous amount of liquidity sloshing around, but we already knew that didn’t we?
Thank you very much for this. Fascinated with Pablo
Hi Ben, appreciate your work, keep it up. As someone who works in the rates market, your description here of the macro reaction in the aftermath of this week’s Fed meeting is a bit inaccurate. The spike in yields on the front end of the curve isn’t explained by the Fed increasing IOER and RRP facility rates by 5bps. The main reason we saw 2-5y yields come up significantly was the hawkish dot plot that projected two median hikes in 2023 (up from zero at the last Fed meeting) followed by James Bullard’s interview with CNBC Friday morning that was even more hawkish, talking about a potential rate hike in 2022. This triggered a rapid unwinding of 2s10s and 5s30s steepener trades from large hedge funds, and that unwind caused a major bear flattener on the yield curve with the short end coming up significantly and 10-30y yields falling. This positioning signals that the rates market is preparing for a tighter monetary environment sooner than previously expected.
It’s true that the RRP facility spiked to an insane $750bn after they adjusted the rate to 5bps, however it was already north of $500bn before the meeting. It’s not true that the Fed exchanges these overnight reserves for short term treasuries and it’s not true that this is what’s affected short end yields. The growth in the RRP facility has been often tweeted about by many lately as a sort of ominous sign of an incoming crash, but it’s not clear that that’s the case. Bank’s reserve ratios are still at zero since covid, so banks aren’t lending to other banks overnight at the effective to balance out reserve requirements, and with the steep recent drawdown of the Treasury General Account putting a lot of downward pressure on overnight and short term yields, it just makes sense for banks to park excess liquidity at the Fed. The surge in RRP certainly is a sign of a massive and potentially dangerous amount of liquidity sloshing around, but we already knew that didn’t we?
Is there a way we, the plebs, can watch Pablo?
Really do appericate your articles with high accuracy! could you let me know how I can join as a private client?