Funding Issues Gaining Importance
Sept 26, 2019
–Rates jumped yesterday, more than reversing Tuesday’s fall as stocks reacted positively to Trump releasing the Ukraine call transcript. In euro$’s reds through golds fell 9 to 10.5. The ten year yield likewise rose 10 bps as the five year auction was slightly soft; sevens auctioned today. While Fed officials are mostly shrugging off the repo turmoil – Bullard referred to it as a MICRO economic issue and Brainard said it was due to a confluence of technical issues – the NY Fed increased the size of repo operations to $100 billion from $75 billion on daily and $60 from $30 on term ops. Outside of the Fed, experts are suggesting more: ex-NY desk head Brian Sack and Joseph Gagnon say the Fed should explicitly target repo and buy $250 billion treasuries. QE and/or a standing repo facility will probably be announced in October.
–Funding in a more general sense seems to have become a larger issue. For example, Goldman is cutting exposure to Softbank after the WeWork fiasco. Softbank is trying to secure funding from employees, the Saudis are pressuring oil elite to invest in Aramco. At the same time, Brainard said leverage loan covenants have “weakened notably”.
–Worth a mention is that Sabine Lautenschlager resigned from the ECB due to her disagreement with the need for more stimulus (is Lagarde ready for the hand-off?) and Kuroda is citing overseas weakness as a potential reason for increased stimulus. The political divide in the US seems to be spilling over into central bank politics. In a world of low yields and reduced returns, cash flows aren’t enough to cover funding needs.
–Q2 GDP today expected 2%. Jobless Claims also released. 7 year auction.
–Call buying and adjustment prevalent in ED yesterday. EDZ0 9800/9900 risk reversal settled 4.5 for the call with futures exactly in the middle at 9850; around 44 to 45 delta, it had traded 5.5 ref 9852.5 a couple of days ago.
