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US Treasury yields were 2-3bp lower on Tuesday. Atlanta Fed President Raphael Bostic said that there was no urgency to lower rates, noting that he believes “inflation is going to come down relatively slowly in the next six months”. As per a BofA survey, speculation of the Fed easing is said to be showing the highest investor optimism since the beginning of 2022. The survey noted that investors have reduced cash holdings to a two-year low and are overweight equities at its highest level since February 2022. It added that bonds and tech were expected to be the primary beneficiaries of Fed cuts, in the first half of 2024. US credit markets saw IG CDS spreads tighten by 1.9bp while HY spreads tightened by 3.6bp. US equity markets saw S&P and Nasdaq higher by 0.6-0.7%.
European equity markets ended higher too. In credit markets, European main CDS spreads were 1.2bp wider and crossover spreads tightened by 14.6bp. Asian equity markets have opened in the green today. Asia ex-Japan IG CDS spreads were 0.4bp wider.
This is a new program launched by the Fed earlier this year allowing banks, savings associations, credit unions and eligible depository institutions to borrow funds for up to one year, by pledging US Treasuries and agency debt/MBS as collateral. These assets are valued at par and the interest rate for these funds lent will be set at the 1Y OIS + 10bp. The terms under these loans tend to be easier than those it typically provides for other short term advances. The BTFP is an additional source of liquidity against high-quality securities, helping eliminate an institution’s need to quickly sell such securities in times of stress. BTFP was launched following the turn of events in March after the collapse of SVB and Signature Bank.
On Fed ‘nicely positioned’ amid inflation retreat – Richmond Fed President, Thomas Barkin
“I think we’re nicely positioned now with a 3% inflation rate moving down, and a 3.7% unemployment rate staying relatively steady… We’re making good progress on inflation… We’re not yet done with inflation. I’m hopeful the numbers will come down”
“If inflation continues to come down to target, then the Fed can reconsider how restrictive it wants to be… (markets) got a little ahead of themselves..,. (rate decisions) not about politics”
On the Fed Having a ‘Real Problem’ With Communication – Mohammed El-Erian
“One is to be transparent, and two is to enhance the power of forward policy guidance. Instead, Fed communication confuses people. I think we have a real problem… The market is absolutely correct in trying to do two things – trying to bully the Fed because this Fed seems to be willing to be bullied… carried away with this notion that the Fed put is back”
On Fed’s Newest Tool Becoming More Attractive on Rate-Cut Bets
Wrightson ICAP economist, Lou Crandall
“At first glance, that 10 bp markup (on BTFP) might appear to qualify as the kind of penalty rate typically associated with ‘lender of last resort’ facilities… In practice, however, the BTFP pricing formula turns it into a subsidy rate when the yield curve is downward sloping”