Educate me on today's treasury market quagmire

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daebt376
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Educate me on today's treasury market quagmire

Post by daebt376 » Thu Mar 12, 2020 2:07 pm

Treasury rates are near historic lows, which I assume is due in part to strong buyer demand as well as many countries having negative interest on government bonds. Yet today the Federal Reserve steps-in to be the "buyer of last resort" for trillions of dollars due to weakening market conditions and increasing spreads.

The following statements were posted on MarketWatch today (URL: https://www.marketwatch.com/story/fed-s ... od=the-fed):
The Federal Reserve took two moves to try to calm “unusual disruption” in the U.S. Treasury markets on Thursday.

The Fed said it will lend $1.5 trillion to the short-term funding markets.

In a statement, the Fed also said it would add purchases of Treasury notes and bonds to increase its balance sheet. The central bank had previously been buying only $60 billion of T-bills each month.
Today I heard one analyst explain the market imbalance was due in part to money market funds providing daily liquidity and offsetting their risk with future contracts, requiring greater involvement from hedge fund buyers.

So, is there a shortage of buyers and, if so, why isn't the market pushing the rates higher to attract more buyers?
Last edited by daebt376 on Thu Mar 12, 2020 9:08 pm, edited 2 times in total.

Caduceus
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Re: Educate me on on today's treasury market quagmire

Post by Caduceus » Thu Mar 12, 2020 2:10 pm

Take a look at Neil Irwin's piece (I think it was on the NYT). He says that there have been "weird" things happening that suggests a short-term liquidity crunch. It's a surprisingly vague piece - it isn't backed up with a lot of real investigative journalism and many parts seem speculative, so take it for what you will.

occambogle
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Re: Educate me on on today's treasury market quagmire

Post by occambogle » Thu Mar 12, 2020 2:31 pm

https://www.bloombergquint.com/gadfly/t ... es-it-rain
https://www.nytimes.com/2020/03/12/busi ... s-fed.html
https://finance.yahoo.com/news/50-trill ... 57519.html

Disclaimer: I have no idea what it all really means. But I have had some EDV and not very happy today watching it drop 4.4% so far....
Last edited by occambogle on Thu Mar 12, 2020 3:12 pm, edited 2 times in total.

mroe800
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Re: Educate me on on today's treasury market quagmire

Post by mroe800 » Thu Mar 12, 2020 3:02 pm

Try holding TMF.

marky2kk
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Re: Educate me on on today's treasury market quagmire

Post by marky2kk » Thu Mar 12, 2020 3:15 pm

daebt376 wrote:
Thu Mar 12, 2020 2:07 pm

So, Is there a shortage of buyers and, if so, why isn't the market pushing the rates higher to attract more buyers?
That's what happened yesterday. Some actors perhaps were forced to delever, demanded cash, and yields went up yesterday as stocks went down. The bloomberg article points to hedge funds that are unwinding their cash-futures basis trades by selling the closest-to-delivery contract.

On a more fundamental level, the issues seems to be that order books are thin. If order books are thin and you are a large player and make an order, you may have price impact which may prevent you from doing the order in the first place. So liquidity dries up and bid-ask spreads widen which is a problem for a multitude of reasons in what is supposed to be most liquid and deepest market in the world...if somebody does make an order, there will be a spike in yields because of the wide bid-ask spread. That spike may force someone to unwind his trade, etc. which is why the Fed intervenes and now pumps liquidity into short-term funding markets and amplifies QE.

I guess the short-term funding market is connected to the treasury market through dealer's balance sheet constraints, so improved liquidity in short-term funding markets will also improve liquidity in the treasury market, although all the technicalities are also unclear to me. I also had a hard time understanding the technical details of what happened last September or whenever it was.

I was not around back then, but this is all very reminiscent of liquidity spirals and liquidity drying up during 2008.

alex_686
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Re: Educate me on on today's treasury market quagmire

Post by alex_686 » Thu Mar 12, 2020 3:22 pm

Ok, the fed wants to keep rates low.

However, the banks have a problem. They are solvent (more assets then liabilities) but not liquid (little cash). The normal method would be to lend out some 30 year mortgages for that cash. This happens daily. Unless everybody trying to borrow.

Now, this could lead to higher rates. Or it could lead to a bank not having enough liquid reserves. Which means they get taken over by the FDIC. Then there is a run on the banks. Then nobody lends. And the system collapses. This is called - I kid you not - contagion.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

Caduceus
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Re: Educate me on on today's treasury market quagmire

Post by Caduceus » Thu Mar 12, 2020 3:23 pm

marky2kk wrote:
Thu Mar 12, 2020 3:15 pm
daebt376 wrote:
Thu Mar 12, 2020 2:07 pm

So, Is there a shortage of buyers and, if so, why isn't the market pushing the rates higher to attract more buyers?
That's what happened yesterday. Some actors perhaps were forced to delever, demanded cash, and yields went up yesterday as stocks went down. The bloomberg article points to hedge funds that are unwinding their cash-futures basis trades by selling the closest-to-delivery contract.

On a more fundamental level, the issues seems to be that order books are thin. If order books are thin and you are a large player and make an order, you may have price impact which may prevent you from doing the order in the first place. So liquidity dries up and bid-ask spreads widen which is a problem for a multitude of reasons in what is supposed to be most liquid and deepest market in the world...if somebody does make an order, there will be a spike in yields because of the wide bid-ask spread. That spike may force someone to unwind his trade, etc. which is why the Fed intervenes and now pumps liquidity into short-term funding markets and amplifies QE.

I guess the short-term funding market is connected to the treasury market through dealer's balance sheet constraints, so improved liquidity in short-term funding markets will also improve liquidity in the treasury market, although all the technicalities are also unclear to me. I also had a hard time understanding the technical details of what happened last September or whenever it was.

I was not around back then, but this is all very reminiscent of liquidity spirals and liquidity drying up during 2008.
In 2008, there was a lot of forced deleveraging. But why would there be forced deleveraging now? I read an article about quant funds with risk-parity trades finding themselves losing a lot of money this time around and being forced to deleverage, but their market share of total market assets seems really low to have much of a sustained impact.

Caduceus
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Re: Educate me on on today's treasury market quagmire

Post by Caduceus » Thu Mar 12, 2020 3:27 pm

alex_686 wrote:
Thu Mar 12, 2020 3:22 pm
Ok, the fed wants to keep rates low.

However, the banks have a problem. They are solvent (more assets then liabilities) but not liquid (little cash). The normal method would be to lend out some 30 year mortgages for that cash. This happens daily. Unless everybody trying to borrow.

Now, this could lead to higher rates. Or it could lead to a bank not having enough liquid reserves. Which means they get taken over by the FDIC. Then there is a run on the banks. Then nobody lends. And the system collapses. This is called - I kid you not - contagion.
Is this factually accurate? I don't have a bird's eye view of all the financial institutions but I've read the balance sheets of a couple of financial institutions (ranging from small-cap to big-cap institutions) in great detail for valuation purposes and it does not seem accurate at all that they have little cash or liquid reserves. The ones I've studied and know well are extremely well capitalized and are actually lending much less than they have historically, which is why their return on assets are historically low.

alex_686
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Re: Educate me on on today's treasury market quagmire

Post by alex_686 » Thu Mar 12, 2020 3:32 pm

Caduceus wrote:
Thu Mar 12, 2020 3:27 pm
Is this factually accurate? I don't have a bird's eye view of all the financial institutions but I've read the balance sheets of a couple of financial institutions (ranging from small-cap to big-cap institutions) in great detail for valuation purposes and it does not seem accurate at all that they have little cash or liquid reserves. The ones I've studied and know well are extremely well capitalized and are actually lending much less than they have historically, which is why their return on assets are historically low.
From my trench viewpoint it is very true. Some banks are running low on money.

To restate, one can be well capitalized and yet be forced to close. The FDIC does care about liquidity. It does bot matter how many 30 year mortgages you have in the vault, you also have to have cash. In good tines one can exchange mortgages for cash easily. Not so today.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

Caduceus
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Re: Educate me on on today's treasury market quagmire

Post by Caduceus » Thu Mar 12, 2020 3:38 pm

alex_686 wrote:
Thu Mar 12, 2020 3:32 pm
Caduceus wrote:
Thu Mar 12, 2020 3:27 pm
Is this factually accurate? I don't have a bird's eye view of all the financial institutions but I've read the balance sheets of a couple of financial institutions (ranging from small-cap to big-cap institutions) in great detail for valuation purposes and it does not seem accurate at all that they have little cash or liquid reserves. The ones I've studied and know well are extremely well capitalized and are actually lending much less than they have historically, which is why their return on assets are historically low.
From my trench viewpoint it is very true. Some banks are running low on money.

To restate, one can be well capitalized and yet be forced to close. The FDIC does care about liquidity. It does bot matter how many 30 year mortgages you have in the vault, you also have to have cash. In good tines one can exchange mortgages for cash easily. Not so today.
I don't mean to be dense, but why are they running low on money exactly? What is causing it?

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firebirdparts
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Re: Educate me on on today's treasury market quagmire

Post by firebirdparts » Thu Mar 12, 2020 3:38 pm

Caduceus wrote:
Thu Mar 12, 2020 3:23 pm
In 2008, there was a lot of forced deleveraging. But why would there be forced deleveraging now? I read an article about quant funds with risk-parity trades finding themselves losing a lot of money this time around and being forced to deleverage, but their market share of total market assets seems really low to have much of a sustained impact.
I am way out of my pay grade here. What if, there are a lot of leveraged-up businesses/funds/trading desks/investment banks/pensions/insurance companies/endowments etc. trying to make a tiny fraction of a penny each day using derivatives/options/futures/alternative strategies. The low volatility of the last 10 years has convinced these people that they just need to leverage up more and more, and gradually, over years, they have gotten too many plates in the air. There was all this discussion last fall about how the repo market broke down overnight over and over, and nobody could say exactly why. Repos are essentially just pointless zero-sum contracts that in theory do very little. In theory, if you don't renew a repo contract one night, it shouldn't be the end of the world. That assumes that people have a desire for self-preservation, and we know that's a bad assumption.
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Re: Educate me on on today's treasury market quagmire

Post by Caduceus » Thu Mar 12, 2020 3:43 pm

firebirdparts wrote:
Thu Mar 12, 2020 3:38 pm
Caduceus wrote:
Thu Mar 12, 2020 3:23 pm
In 2008, there was a lot of forced deleveraging. But why would there be forced deleveraging now? I read an article about quant funds with risk-parity trades finding themselves losing a lot of money this time around and being forced to deleverage, but their market share of total market assets seems really low to have much of a sustained impact.
I am way out of my pay grade here. What if, there are a lot of leveraged-up businesses/funds/trading desks/investment banks/pensions/insurance companies/endowments etc. trying to make a tiny fraction of a penny each day using derivatives/options/futures/alternative strategies. The low volatility of the last 10 years has convinced these people that they just need to leverage up more and more, and gradually, over years, they have gotten too many plates in the air. There was all this discussion last fall about how the repo market broke down overnight over and over, and nobody could say exactly why. Repos are essentially just pointless zero-sum contracts that in theory do very little. In theory, if you don't renew a repo contract one night, it shouldn't be the end of the world. That assumes that people have a desire for self-preservation, and we know that's a bad assumption.
The part about options actually makes sense to me. Buyers of deep out of the money put options have probably made a killing. The proverbial rare event has come to passed, and institutions that sold lots of out of the money options for premium pennies are taking huge losses now.

Repos are a big deal - if you can't roll over borrowing, no one's going to trust the system. That's like a surefire way to start a run on the banks.

alex_686
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Re: Educate me on on today's treasury market quagmire

Post by alex_686 » Thu Mar 12, 2020 3:54 pm

Caduceus wrote:
Thu Mar 12, 2020 3:38 pm
I don't mean to be dense, but why are they running low on money exactly? What is causing it?
Don’t feel dense. It is a complex system.

From a very simple viewpoint, as a bank I might need $100m. Payroll, large withdrawal, whatever. I don’t have 100m in the vault. Thats ok, I have $110m in 30 year mortgages in the vault. I can just call up another bank and borrow the 100m overnight. This is totally normal. I have seen a guy either raise or lend out a billion in a hour.

This assumes that other banks have money to lend. Which may not be true. Lack of liquidity.

As a side note, the issuance of bank debt is running behind schedule this month. Old debt matures so new debt needs to be issued. But what bank is going to throw our new bonds in such chaotic waters?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

marky2kk
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Re: Educate me on on today's treasury market quagmire

Post by marky2kk » Thu Mar 12, 2020 4:02 pm

Caduceus wrote:
Thu Mar 12, 2020 3:23 pm
marky2kk wrote:
Thu Mar 12, 2020 3:15 pm
daebt376 wrote:
Thu Mar 12, 2020 2:07 pm

So, Is there a shortage of buyers and, if so, why isn't the market pushing the rates higher to attract more buyers?
That's what happened yesterday. Some actors perhaps were forced to delever, demanded cash, and yields went up yesterday as stocks went down. The bloomberg article points to hedge funds that are unwinding their cash-futures basis trades by selling the closest-to-delivery contract.

On a more fundamental level, the issues seems to be that order books are thin. If order books are thin and you are a large player and make an order, you may have price impact which may prevent you from doing the order in the first place. So liquidity dries up and bid-ask spreads widen which is a problem for a multitude of reasons in what is supposed to be most liquid and deepest market in the world...if somebody does make an order, there will be a spike in yields because of the wide bid-ask spread. That spike may force someone to unwind his trade, etc. which is why the Fed intervenes and now pumps liquidity into short-term funding markets and amplifies QE.

I guess the short-term funding market is connected to the treasury market through dealer's balance sheet constraints, so improved liquidity in short-term funding markets will also improve liquidity in the treasury market, although all the technicalities are also unclear to me. I also had a hard time understanding the technical details of what happened last September or whenever it was.

I was not around back then, but this is all very reminiscent of liquidity spirals and liquidity drying up during 2008.
In 2008, there was a lot of forced deleveraging. But why would there be forced deleveraging now? I read an article about quant funds with risk-parity trades finding themselves losing a lot of money this time around and being forced to deleverage, but their market share of total market assets seems really low to have much of a sustained impact.
I read the same thing about risk-parity funds, but in the end, who knows. Maybe we are all reading the same article. Afaik they have an estimated couple of hundred billion in assets. Fact is something odd happened yesterday afternoon in the treasury market when liquidity markably deteriorated and LTTs yields went up as stocks crashed down. That creates a lot of uncertainty as to whether what the hedge asset is. If you don't think LTTs are the hedge anymore, you just exit and demand cash.

I am not sure about the amount of cash in the system. Wasn't the whole point of September's repo operations that there was too little cash in the system?

It seems like the bank run today is not coming on the asset side, but on the liability side. Many appear to have plans to draw on their credit lines, leaving the banks short of cash. (https://www.bloomberg.com/news/articles ... edit-lines)

Caduceus
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Re: Educate me on on today's treasury market quagmire

Post by Caduceus » Thu Mar 12, 2020 4:04 pm

alex_686 wrote:
Thu Mar 12, 2020 3:54 pm
Caduceus wrote:
Thu Mar 12, 2020 3:38 pm
I don't mean to be dense, but why are they running low on money exactly? What is causing it?
Don’t feel dense. It is a complex system.

From a very simple viewpoint, as a bank I might need $100m. Payroll, large withdrawal, whatever. I don’t have 100m in the vault. Thats ok, I have $110m in 30 year mortgages in the vault. I can just call up another bank and borrow the 100m overnight. This is totally normal. I have seen a guy either raise or lend out a billion in a hour.

This assumes that other banks have money to lend. Which may not be true. Lack of liquidity.

As a side note, the issuance of bank debt is running behind schedule this month. Old debt matures so new debt needs to be issued. But what bank is going to throw our new bonds in such chaotic waters?
I still don't understand the answer. Your response seems to be that Bank A is running out of money because Bank B is running out of money - but what's causing Bank B to be running out of liquidity in the first place in this current environment? Is your answer that it might be one of a number of complex things but you don't know what they are yet?

marky2kk
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Re: Educate me on on today's treasury market quagmire

Post by marky2kk » Thu Mar 12, 2020 4:11 pm

Caduceus wrote:
Thu Mar 12, 2020 3:38 pm
alex_686 wrote:
Thu Mar 12, 2020 3:32 pm
Caduceus wrote:
Thu Mar 12, 2020 3:27 pm
Is this factually accurate? I don't have a bird's eye view of all the financial institutions but I've read the balance sheets of a couple of financial institutions (ranging from small-cap to big-cap institutions) in great detail for valuation purposes and it does not seem accurate at all that they have little cash or liquid reserves. The ones I've studied and know well are extremely well capitalized and are actually lending much less than they have historically, which is why their return on assets are historically low.
From my trench viewpoint it is very true. Some banks are running low on money.

To restate, one can be well capitalized and yet be forced to close. The FDIC does care about liquidity. It does bot matter how many 30 year mortgages you have in the vault, you also have to have cash. In good tines one can exchange mortgages for cash easily. Not so today.
I don't mean to be dense, but why are they running low on money exactly? What is causing it?
There may be other reasons and, again, I would need to read up on the technical details on how money is created, but ultimately it appears to be because of the Fed's balance sheet reduction after years of QE. https://www.federalreserve.gov/monetary ... trends.htm

less QE = less cash/liquidity.

in September 2019 shit hit the fan and there was too little liquidity in the system and the Fed instated short-term repo operations. Now it seems these repo operations have been extended + QE is back? I don't think they call it QE and it technically wasn't at first, but if you do the same thing over and over again... https://www.marketwatch.com/story/the-f ... 2020-01-16

alex_686
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Re: Educate me on on today's treasury market quagmire

Post by alex_686 » Thu Mar 12, 2020 4:19 pm

Caduceus wrote:
Thu Mar 12, 2020 4:04 pm
I still don't understand the answer. Your response seems to be that Bank A is running out of money because Bank B is running out of money - but what's causing Bank B to be running out of liquidity in the first place in this current environment? Is your answer that it might be one of a number of complex things but you don't know what they are yet?
B might have the cash. But maybe they are on a “risk off” position and don’t want to take that overnight rusk. Maybe they want to shore up their own books. After all, they might need to horde cash if they can’t issue new bonds.

During the 2008 crisis the repo and commercial paper market was considered as good as cash - and then wasn’t.

Or maybe you are asking a more fundamental question about market panics, loss of faith and confidence in our bank, and contagion. Which is above my pay scale.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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daebt376
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Re: Educate me on on today's treasury market quagmire

Post by daebt376 » Thu Mar 12, 2020 4:34 pm

Thanks to all for the ongoing discussion - please continue to add insight as appropriate. I've never been all that familiar with the overnight lending markets, and the comments help fill-in the gaps in my understanding.

occambogle: Thank you for the links.

occambogle
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Re: Educate me on on today's treasury market quagmire

Post by occambogle » Thu Mar 12, 2020 4:35 pm

MarketWatch article: https://on.mktw.net/2wORFcA

FIREmeup
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Re: Educate me on on today's treasury market quagmire

Post by FIREmeup » Thu Mar 12, 2020 4:38 pm

I am a professional trader. The bond ETFs are unbelievably illiquid. They are trading at substantial discount to NAV. The bond market liquidity has completely dried up so hedging by ETF market makers is almost impossible. Money is being raised like it was mentioned because people are calling on their revolvers. Deleveraging is happening. The cash has gone to all these zombie companies who have used ultra low rates to boot strap and survive the pas decade. I dont know what the answer is but I know as a trader it is terrifying to see. The Fed essentially announced unlimited liquidity to the bond market today and the bond market could care less. Everything is being sold, this is indeed panic, but are the sellers right? There are no safe havens...not even crypto which so many promised would be.

Northern Flicker
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Re: Educate me on on today's treasury market quagmire

Post by Northern Flicker » Thu Mar 12, 2020 4:39 pm

This podcast has a very detailed explanation of the September 2019 liquidity event.

https://www.bloomberg.com/news/audio/20 ... zy-podcast
Risk is not a guarantor of return.

Walkure
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Re: Educate me on on today's treasury market quagmire

Post by Walkure » Thu Mar 12, 2020 5:03 pm

Northern Flicker wrote:
Thu Mar 12, 2020 4:39 pm
This podcast has a very detailed explanation of the September 2019 liquidity event.

https://www.bloomberg.com/news/audio/20 ... zy-podcast
I was just about to dig up this same podcast. Everyone acts like the repo market is super difficult to comprehend, but FWIW this is my lay investor's take:
1. Every night each bank has to have enough on its books to meet its capitalization requirements,
2. After the financial crisis these requirements were increased,
3. Banks with excess reserves lend overnight repos to banks that find themselves short on liquidity at the end of the day,
4. In theory, the Fed window is the lender of last resort so if a bank can't secure funding elsewhere it should never be left high and dry,
5. However, also after the financial crisis certain regulations and stress-testing metrics made it so that, as a practical matter, no investment bank can actually draw from the Fed without signalling a Lehman-like status that would turn into a death spiral on their commercial paper and ability to borrow the next day,
6. So in practice JPMorgan has basically been single-handedly functioning as the lender of penultimate resort,
7. And every time the Fed tries to tighten or trim its balance sheet, it only takes one day where JPMorgan is tight on liquidity and the whole system seizes up, causing
8. The Fed to reexpand its balance sheet and dump money out of helicopters. Wash, rinse, repeat...

alex_686
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Re: Educate me on on today's treasury market quagmire

Post by alex_686 » Thu Mar 12, 2020 5:06 pm

A factoid just crossed my desk. It has been 9 days since there has been a new issue of investment grade bonds. This would be a very long dry spell. If corporations can't turn to the bond market, they turn to banks.It has got to have a impact.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: Educate me on on today's treasury market quagmire

Post by fru-gal » Thu Mar 12, 2020 5:06 pm

Caduceus wrote:
Thu Mar 12, 2020 3:27 pm
alex_686 wrote:
Thu Mar 12, 2020 3:22 pm
Ok, the fed wants to keep rates low.

However, the banks have a problem. They are solvent (more assets then liabilities) but not liquid (little cash). The normal method would be to lend out some 30 year mortgages for that cash. This happens daily. Unless everybody trying to borrow.

Now, this could lead to higher rates. Or it could lead to a bank not having enough liquid reserves. Which means they get taken over by the FDIC. Then there is a run on the banks. Then nobody lends. And the system collapses. This is called - I kid you not - contagion.
Is this factually accurate? I don't have a bird's eye view of all the financial institutions but I've read the balance sheets of a couple of financial institutions (ranging from small-cap to big-cap institutions) in great detail for valuation purposes and it does not seem accurate at all that they have little cash or liquid reserves. The ones I've studied and know well are extremely well capitalized and are actually lending much less than they have historically, which is why their return on assets are historically low.
Why would there be a run on banks when there is FDIC insurance?

alex_686
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Re: Educate me on on today's treasury market quagmire

Post by alex_686 » Thu Mar 12, 2020 5:12 pm

fru-gal wrote:
Thu Mar 12, 2020 5:06 pm
Why would there be a run on banks when there is FDIC insurance?
Because FDIC stops at 250k. Remember, we are talking about banks borrowing overnight cash from other banks. The overnight lending amounts between banks start at 10m, and 100m+ is common.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

marky2kk
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Re: Educate me on on today's treasury market quagmire

Post by marky2kk » Thu Mar 12, 2020 5:19 pm

occambogle wrote:
Thu Mar 12, 2020 4:35 pm
MarketWatch article: https://on.mktw.net/2wORFcA
That was a good read.

So basically it's rebalancing mutual funds and hedge funds unwhinding their basis trades leading to excess supply for off-the run-treasuries + dealers unwilling / unable to put the off-the-run on their balance sheets in tomes of high volatility when they are unsure whether to find a new buyer. This leads to a dry market for off-the-run treasuries and a wide spread between on and off the run.

Other actors presumably don't step in because of the same constraints or price impact in an illiquid market, a classic liquidity dryup. Still odd after all as this is presumably an arbitrage opportunity. You could short the on-the-run, buy the off-the-run, hedge interest rate risk and pocket the difference. But I guess that's the whole point: it's worrying that nobody is willing to do this.

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Re: Educate me on on today's treasury market quagmire

Post by Northern Flicker » Thu Mar 12, 2020 6:51 pm

Walkure wrote:
Thu Mar 12, 2020 5:03 pm
Northern Flicker wrote:
Thu Mar 12, 2020 4:39 pm
This podcast has a very detailed explanation of the September 2019 liquidity event.

https://www.bloomberg.com/news/audio/20 ... zy-podcast
I was just about to dig up this same podcast. Everyone acts like the repo market is super difficult to comprehend, but FWIW this is my lay investor's take:
1. Every night each bank has to have enough on its books to meet its capitalization requirements,
2. After the financial crisis these requirements were increased,
3. Banks with excess reserves lend overnight repos to banks that find themselves short on liquidity at the end of the day,
4. In theory, the Fed window is the lender of last resort so if a bank can't secure funding elsewhere it should never be left high and dry,
5. However, also after the financial crisis certain regulations and stress-testing metrics made it so that, as a practical matter, no investment bank can actually draw from the Fed without signalling a Lehman-like status that would turn into a death spiral on their commercial paper and ability to borrow the next day,
6. So in practice JPMorgan has basically been single-handedly functioning as the lender of penultimate resort,
7. And every time the Fed tries to tighten or trim its balance sheet, it only takes one day where JPMorgan is tight on liquidity and the whole system seizes up, causing
8. The Fed to reexpand its balance sheet and dump money out of helicopters. Wash, rinse, repeat...
That’s a good summary of the podcast. Basically we have new financial plumbing for how overnight liquidity works due to regulatory changes after 2008/2009. I think it was part of Dodd-Frank. It was tested last September, and the Fed stepped up as expected. We have never had it recession-tested, and the Fed balance sheets and interest rates look very different than they have heading into recessions in the past. It should make for interesting times.
Risk is not a guarantor of return.

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Re: Educate me on on today's treasury market quagmire

Post by Caduceus » Thu Mar 12, 2020 7:15 pm

FIREmeup wrote:
Thu Mar 12, 2020 4:38 pm
I am a professional trader. The bond ETFs are unbelievably illiquid. They are trading at substantial discount to NAV. The bond market liquidity has completely dried up so hedging by ETF market makers is almost impossible. Money is being raised like it was mentioned because people are calling on their revolvers. Deleveraging is happening. The cash has gone to all these zombie companies who have used ultra low rates to boot strap and survive the pas decade. I dont know what the answer is but I know as a trader it is terrifying to see. The Fed essentially announced unlimited liquidity to the bond market today and the bond market could care less. Everything is being sold, this is indeed panic, but are the sellers right? There are no safe havens...not even crypto which so many promised would be.
Does this have anything to do with volatility, in the sense that the usual arbitrageurs are unwilling to buy the bond ETF and then sell the individual underlying issues because the pricing of the underlying bonds is moving very quickly over seconds, so that there are problems with execution?

I don't know anything about bond arbitraging and the mechanics of it, but the volatility in the stock market has been crazy. If someone were to try to buy a stock ETF and sell the underlying because of a difference in NAV, unless it could happen instantaneously, the second-to-second price changes are just crazy.

Do you know, mechanically, how arbitrage takes place? I mean, can someone buy a bond etf and simultaneously sell all the individual issues it contains in the same second?

alex_686
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Re: Educate me on on today's treasury market quagmire

Post by alex_686 » Thu Mar 12, 2020 7:23 pm

FIREmeup wrote:
Thu Mar 12, 2020 4:38 pm
I am a professional trader. The bond ETFs are unbelievably illiquid. They are trading at substantial discount to NAV. The bond market liquidity has completely dried up so hedging by ETF market makers is almost impossible.
Former mutual fund account, professional fixed income something.

Thus feels wrong. When this happened in 2008 the bond market froze. We had to enter in stale bond prices to get the NAV. NAVs are just the accountants estimates.

The ETFs were much more liquid. Yeah, they were trading below NAV. However, the market prices were more accurate than our estimates.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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daebt376
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Re: Educate me on today's treasury market quagmire

Post by daebt376 » Thu Mar 12, 2020 9:04 pm

marky2kk wrote:
Thu Mar 12, 2020 5:19 pm
occambogle wrote:
Thu Mar 12, 2020 4:35 pm
MarketWatch article: https://on.mktw.net/2wORFcA
That was a good read.
+1. Certainly an insightful article for anyone looking to learn some of the market mechanics.

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firebirdparts
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Re: Educate me on on today's treasury market quagmire

Post by firebirdparts » Thu Mar 12, 2020 10:11 pm

Caduceus wrote:
Thu Mar 12, 2020 3:43 pm

Repos are a big deal - if you can't roll over borrowing, no one's going to trust the system. That's like a surefire way to start a run on the banks.
Well, sort of. In a repo, both sides should be equally in debt. If you can't handle a contract that only lasts 1 day, then that's too big of a contract.
A fool and your money are soon partners

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firebirdparts
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Re: Educate me on on today's treasury market quagmire

Post by firebirdparts » Thu Mar 12, 2020 10:20 pm

FIREmeup wrote:
Thu Mar 12, 2020 4:38 pm
I am a professional trader. The bond ETFs are unbelievably illiquid. They are trading at substantial discount to NAV. The bond market liquidity has completely dried up so hedging by ETF market makers is almost impossible. Money is being raised like it was mentioned because people are calling on their revolvers. Deleveraging is happening. The cash has gone to all these zombie companies who have used ultra low rates to boot strap and survive the pas decade. I dont know what the answer is but I know as a trader it is terrifying to see. The Fed essentially announced unlimited liquidity to the bond market today and the bond market could care less. Everything is being sold, this is indeed panic, but are the sellers right? There are no safe havens...not even crypto which so many promised would be.
Thank you for that. I have been wondering about that particular issue for years. I don't know what it's really like to trade bonds, but in my mind I imagined they are traded "over the counter" and that it would be a horrible mess to try to keep up with bond ETFs.
A fool and your money are soon partners

lgs88
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Re: Educate me on on today's treasury market quagmire

Post by lgs88 » Thu Mar 12, 2020 10:23 pm

alex_686 wrote:
Thu Mar 12, 2020 7:23 pm
FIREmeup wrote:
Thu Mar 12, 2020 4:38 pm
I am a professional trader. The bond ETFs are unbelievably illiquid. They are trading at substantial discount to NAV. The bond market liquidity has completely dried up so hedging by ETF market makers is almost impossible.
Former mutual fund account, professional fixed income something.

Thus feels wrong. When this happened in 2008 the bond market froze. We had to enter in stale bond prices to get the NAV. NAVs are just the accountants estimates.

The ETFs were much more liquid. Yeah, they were trading below NAV. However, the market prices were more accurate than our estimates.
Ah — this was something I wondered about earlier. How do you mark an illiquid bond to market in volatile conditions? That must explain some of the discrepancy between the ETF prices and the NAV. But there must be a way to model the loss of value implied in the bonds’ illiquidity.

The one bit about that Marketwatch article I didn’t understand was why the Fed’s injection of $1.5 trillion wouldn’t loosen up the Treasury market.
merely an interested amateur

luckyducky99
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Re: Educate me on today's treasury market quagmire

Post by luckyducky99 » Thu Mar 12, 2020 10:35 pm

I've only been on this forum a short time, but this is one of the most interesting and informative threads I've read. Thanks to all who are sharing their knowledge.

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Oicuryy
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Re: Educate me on today's treasury market quagmire

Post by Oicuryy » Sat Mar 14, 2020 10:36 pm

daebt376 wrote:
Thu Mar 12, 2020 2:07 pm
So, is there a shortage of buyers
Yes, there was a shortage of buyers.
“We were just trying on Monday to trim a long position in the 30-year Treasury because it had moved so far in our favor and we were unable to get bids from several major dealers,” said Mark Holman, chief executive officer at TwentyFour Asset Management in London, who has been working in the business since 1989. “Dealers don’t have the risk appetite and budget they normally have. But I’ve never seen that before, the inability to trade a U.S. Treasury. And I’m pretty sure I’m not the only one who experienced this.”
https://www.bloomberg.com/news/articles ... ed-it-most

Ron
Money is fungible | Abbreviations and Acronyms

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Re: Educate me on on today's treasury market quagmire

Post by anakinskywalker » Sun Mar 15, 2020 12:49 am

firebirdparts wrote:
Thu Mar 12, 2020 10:11 pm
Caduceus wrote:
Thu Mar 12, 2020 3:43 pm

Repos are a big deal - if you can't roll over borrowing, no one's going to trust the system. That's like a surefire way to start a run on the banks.
Well, sort of. In a repo, both sides should be equally in debt. If you can't handle a contract that only lasts 1 day, then that's too big of a contract.
Repos are basically a fixed term loan. Could be for only a day, and often is. But even if it's only for a day, if you can't borrow the cash you need for that day to comply with regulations and meet your cash needs, you could find yourself in default, or get shut down. Not having enough cash is a very big deal if you are a bank. Even if it's just for one day.

Anakin

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firebirdparts
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Re: Educate me on today's treasury market quagmire

Post by firebirdparts » Sun Mar 15, 2020 3:37 am

I know, but to me, if you have to have a contract go your way every single day or else go out of business, that's not very smart. In all other businesses other than banking, we would never accept a daily threat of immediate ruin.
A fool and your money are soon partners

columbia
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Re: Educate me on today's treasury market quagmire

Post by columbia » Sun Mar 15, 2020 5:39 am

What do these concerns me for buyers and sellers of?:

1. Money market accounts
2. Short term treasury funds
3. Intermediate treasury funds
If you leave your head in the sand for too long, you might get run over by a Jeep.

typical.investor
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Re: Educate me on on today's treasury market quagmire

Post by typical.investor » Sun Mar 15, 2020 6:45 am

mroe800 wrote:
Thu Mar 12, 2020 3:02 pm
Try holding TMF.
What was the issue?

TMF has been great! OK, I am not talking about holding it, I am talking about selling it. Who cares if it trades at some discount to NAV when in fact it’s much higher than it was a few short weeks ago and the stocks you are going to buy are much much lower.

Several times I sold it to see it lower at the end of day. And bought stocks to see them higher at the end of day.

Yeah, I took a hair cut on TMF to get the liquidity that I needed to make a favorable stock purchase but it was worth it.

I am very happy with TMF performance.

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Re: Educate me on today's treasury market quagmire

Post by mroe800 » Sun Mar 15, 2020 12:39 pm

Reply was to the poster above me, I should have quoted. He wasn’t happy with a -4.4% drop in EDV that day. TMF of course dropped harder.

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Kenkat
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Re: Educate me on on today's treasury market quagmire

Post by Kenkat » Sun Mar 15, 2020 12:52 pm

alex_686 wrote:
Thu Mar 12, 2020 5:12 pm
fru-gal wrote:
Thu Mar 12, 2020 5:06 pm
Why would there be a run on banks when there is FDIC insurance?
Because FDIC stops at 250k. Remember, we are talking about banks borrowing overnight cash from other banks. The overnight lending amounts between banks start at 10m, and 100m+ is common.
This is easily solvable. We will all just need to get used to waiting in line at the bank to get our money out in the morning, leaving afternoons free for waiting in line at Costco to buy toilet paper.

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Re: Educate me on on today's treasury market quagmire

Post by Dottie57 » Sun Mar 15, 2020 2:27 pm

Kenkat wrote:
Sun Mar 15, 2020 12:52 pm
alex_686 wrote:
Thu Mar 12, 2020 5:12 pm
fru-gal wrote:
Thu Mar 12, 2020 5:06 pm
Why would there be a run on banks when there is FDIC insurance?
Because FDIC stops at 250k. Remember, we are talking about banks borrowing overnight cash from other banks. The overnight lending amounts between banks start at 10m, and 100m+ is common.
This is easily solvable. We will all just need to get used to waiting in line at the bank to get our money out in the morning, leaving afternoons free for waiting in line at Costco to buy toilet paper.
True dat.

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