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there are a lot of important spreads 学び始める
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SOFR to Eurodollar, to Fed Funds, cross-currency swaps, commercial paper, term rates
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unsecured, overnight market
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repo market, also uninsured but it is secured, overnight
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offshore, unsecured, termed (1m, 3m...)
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unsure and unsecured, the official policy rate of the Fed 学び始める
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banks are lending to each other with no collateral within the US overnight, interbank deposit system, it used to be a big market because of low reserves, with scarce reserves just because of payments banks needed to move funds around, they dont need to redistribute them as much intraday to meet their payment obligation
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what is it used for today? 学び始める
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it's still the official policy target some banks still need to keep their cash in this interbank unsecured market for regulatory reasons
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Reserves today vs pre GFC the fed did not pay interest on reserves pre-GFC, the reserves were not remunerated by the Fed 学び始める
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reserves had to be pretty scarce for rates to remain at a target equilibrium, natural rate that they earned was 0, that 3% FFR was a premium due to the scarcity of the reserves in the market
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now the Fed pays 4.35% on reserves 学び始める
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even though reserves are much more plentiful, the market rate of reserves is much closer to that value, because the fed is paying interest on them
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federal home loan banks which 学び始める
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do not earn interest on reserves so they cant earn IOER, they keep their cash as reserve in the Fed funds market, offer however much liquidity they have or they're willing to part with overnight, banks quote them some level that is lower than ioer that's that's a that's a good Arbitrage
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Fed funds upper limit: 4.50%, Fed funds lower limit: 4.25% 学び始める
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Overnight reverse repo rate: 4.30%, Secured Overnight Financing Rate: 4.32%, Effective FFR: 4.33%, interest on reserve balances: 4.40%
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borrow money from the fed and post their assets as collateral
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if Repo goes above fed funds range 学び始める
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you have a liquidity crisis like in sep 2019
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are medians, around that there are dispersions
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the are some banks that borrow in the fed funds market 学び始める
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institutions within the repo market that have eg. bny melon as a tri-party agent and the Fixed Income Clearing Corporation as a clearinghouse 学び始める
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melon provides custody and collateral monitoring for repo participants, FICC provides netting of transactions and central clearing, all the repos that go through those venues are more or less observable
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repo market is very decentralized a hedge fund goes to a dealer and they say they want to do an OTC dealer trade 学び始める
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the fed does not include the rate in sofr they talk through a bloomberg chat and they do the trade on the dealers books
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sofr as a repo rate includes some segments of the repo market mainly processed by the 2 main central counterparties 学び始める
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but it is not the entirety it does not include any transactions with the federal reserve, so reverse repos coming into the fed or if the fed is doing repo operations that does not show in the reference rates, but they influence the rest of the market
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buckets for the repo market 学び始める
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tri-party, bilateral and sponsored
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Fixed Income Clearing Corporation it nets trades, there are many dealers that are members 学び始める
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it reduces the settlement volume, the members can cancel out trades that offset each other
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Hedge Funds that are not dealers 学び始める
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is a special program offered by FICC can through the dealer execute netted trades as if they were members of FICC, the hedge fund's broker is effectively a member
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market and set up an account with BNY mellon 学び始める
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and they lend cash repo or drain cash from the reverse repo facility they do it through those accounts, they are not included in the SOFR or reference rates
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general vs specific collateral 学び始める
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if sb wants a repo to source a treasury, they usually want a specific treasury, on the runs or the cheapest to deliver issues, the most recently issued or the ones referenced by the futures contract
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there far fewer 9 year Treasuries if you buy 10y Treasury future 学び始める
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they are short 10y Treasury future, they have to hedge that, there is a small number of securities that are deliverable into those futures, theres usually the cheapest and the most favored by the contract to be delivered
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the way this preference for on the run Treasuries is expressed is 学び始める
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that people want to borrow these securities
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the security that is in high demand in the repo market 学び始める
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the rate to borrow cash against that security might be lower eg. 2% many people want to obtain it so they will sacrifice most of the yield on their cash in order just to get that specific security to use for hedging or whatever, it's called a special, that's the distinction between general and specific collateral repo
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with specific collateral repo 学び始める
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you see the divergence of certain repo rates
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agency mortgage backed are in the groupings of securities 学び始める
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general collateral baskets develop, note, bond, bill, floating rate note, strips are a seperate bucket, all of them are general
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in 2008 private MBS, non-agency MBS, CDOs, equity tranches, leveraged loans 学び始める
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solvent banks were telling them: collateral is worth 70c, 60c on the dollar
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repo against lower quality collateral 学び始める
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does exist, it's just not very big
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sovereign debt was a general collateral basket in Europe repo backed by german bunds 学び始める
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before the sovereign debt crisis is not equivalent by repo backed by othe euro sovereign debt
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borrow the expensive one, sell it 学び始める
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observing, following divergences between securities on the yield curve buy the cheap one, bet on converging
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long futures contract, borrow the underlying note in repo and u short it
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customer wants this specific bond from a dealer 学び始める
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to sell them to customers they dont have it in the inventory
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dealer sourced bond in repo to manage the position they need to buy it from somebody else, close out their repo position with a different bond of the same issue 学び始める
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the other option is to keep rolling it, find somebody else in the repo market who wants to lend it them again, the third option is to borrow it from the fed, which has a lot of treasuries, and lends those treasuries out, through the soma facility
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variable collateral, fixed rate, but 学び始める
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soma is specific collateral, but the rate moves up and down, repo rate for the on the run 2 year note
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depending on how many bids are submitted, how much of the security of the fed has 学び始める
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is not a fixed rate facility, it's an auction how many dealers are bidding, and how much they need this security
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dealers didnt have enough of them 学び始める
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a lot of demand to short these bonds volatile, relative value opportunities, they were bidding at a very high rate to obtain these, they can't bid below 5bps
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the derivatives market that is based on them
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sofr vs effective fed funds rate cash is plentiful, collateral is scarce, ffr is higher is less affected 学び始める
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cash vs collateral is the decider low sofr means a glut of cash
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swap based off overnight rate sofr or effr based on libor, sofr spread vs libor, a measure of credit risk and liquidity in the banking system
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spread between eurodollar rate or libor and treasuries
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treasuries should be lower, but 学び始める
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spread between swaps and treasuries they should be about the same, swaps curve is the forward expectation of overnight rates
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trading at this paradoxical discount to swaps is not a directly observable quantity, you have to estimate it from regressions, what the expected rate of rolling something is vs buying the term rate
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december 2023 call spread 学び始める
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that target 2% of the ffr you are paying 10% of the max payout, the market does not think this is not an impossible event
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