FOMC Day Was No Bloodbath, But No Resolution To The SLR Issue -- Bond Yields Will Continue To Rise Further In The Short Term, At Least
Robert P. Balan
Managing Owner and CIO at Predictive Analytic Models / FinaTech Solutions GmbH (CH)
By Robert P. Balan, Predictive Analytic Models
Period Covered: March 17, 2021 (Final)
Summary
- FOMC policy decision was super-dovish, but there was no resolution to the SLR issue, so yields kept on rising, and will continue to do so in the short-term, at least.
- Fed policy remains very accommodative (no change) as FFR will remain at zero until 2023 -- but the Fed decided to kick the SLR can ahead "for a few days."
- PAM now believes that the Fed will NOT renew the SLR exemptions for reserves and Treasury holdings of the commercial and investment banks, and could announce that this coming weekend. The bond yield rally will likely continue further.
- The SLR issue has become politicized, that is why Powell was like treading on eggs while discussing it. The Dems do not want the exemptions to remain and want to end it ASAP. Fed Chair Powell will probably agree to end the exemptions on March 31.
- That is why the FOMC probably decided to to raise the Reverse Repo counterparty limit from $30 Billion to $80 billion --- they are getting to ready to sop up that Treasury Cash Balance (TCB) drawdown avalanche, to a level of less than $500 billion by June end (to comply with the law). Many bond market participants say that this TCB flood is pressuring rates higher. The Fed is probably hoping that the enhanced RRP facility will help relieve the pressure on long term yields.
MARCH 17, 2021
freer7Mar 17, 2021 1:08 AM
zoltan latest
H/t @TheBondFreak pic.twitter.com/zd9JOtjnek— Michael Goodwell (@MichaelGoodwell) March 16, 2021
TimK123Mar 17, 2021 2:03 AM
Interesting perspective, thanks Freer, so Zoltan is saying it's a big nothing burger.
freer7Mar 17, 2021 2:08 AM
Strangely, he was the one who alerted abt the SLR related risks last month. What is he up to??
TimK123Mar 17, 2021 2:09 AM
Maybe he changed his mind once he looked into it?
freer7Mar 17, 2021 2:10 AM
Makes one qn his credibility tho.
TimK123Mar 17, 2021 2:11 AM
Not sure. I guess it's a complex subject so difficult to find the crux of the matter at first glance, if what he says comes true.
flamarkMar 17, 2021 2:16 AM
I'm with Tim.. I am/was the master of worrying about everything that could go wrong..
freer7Mar 17, 2021 2:16 AM
Same here and he got us all worried..lol
robert.p.balanMar 17, 2021 4:37 AM
freer7Mar 17, 2021 4:37 AM
Hi Robert!
Another p.o.v.
To extend or not to extend the SLR exemption?
= to have unconstrained or constrained M2 growth?
Probably the Fed will choose the latter.
— Barton (@Barton_options) March 17, 2021
robert.p.balanMar 17, 2021 4:40 AM
You have to question the judgment or even motives of Pozsar. He says if there is mayhem, and I am almost sure there will be if the Fed does not address this issue, the FRA OIS spread falls to zero. THAT has serious implications.
Let me show that one.
If the FRA-OIS spread falls to zero, repo rates will go negative, long bond yields will soar, but the DXY will collapse,
robert.p.balanMar 17, 2021 5:10 AM
Think about this -- Pozsar says the banks can always raise capital to COMPLY with the SLR provisions -- but that is what the PDs/MOTUs do not want to do. It is a lot easier to shed the excess baggage of Treasuries.
Well, I guess it is Credit Swiss versus JPM in this issue. JPM's President J. Dimon was adamantly opposed to the keeping the SLR provisions as is when the regulation is re-imposed,
freer7Mar 17, 2021 5:16 AM
Wow, the chart is very clear in the correlations! Thanks again Robert for guiding us thru this confusing time..
freer7Mar 17, 2021 5:26 AM
Hopefully, there are cool heads at the FED and they wont listen to Pozsar this time like they did in 2019.
robert.p.balanMar 17, 2021 5:28 AM
freer7 "To extend or not to extend the SLR exemption?
= to have unconstrained or constrained M2 growth?"
The query is non-sequitor -- M2 has absolutely nothing to do with Yields or SLR -- the genesis of M2 is US debt issuance.
freer7Mar 17, 2021 4:13 AM
A Tougher Road Ahead for Small Caps? | Morgan Stanley
After almost a year of extraordinary outperformance, could small caps see more difficulties ahead as re-opening dynamics up the risk of cost pressures?
flytightMar 17, 2021 11:54 AM
robert.p.balan Good morning Robert. I have re-read your SLR comments from yesterday several times now, making sure I clearly understand this significant issue facing the Feds, the Treasury Dept. (Gov't) the major trading banks and MOTUs and last bit not least Treasury investors both local and foreign.
I would like you to clarify your position as to how this will likely play out between now and month-end when the Feds need to make a decision that will significantly impact Treasury prices and yields. There is it seems to me a big opportunity here, and we are only two weeks away, maybe even hrs away to 2:00.
robert.p.balanMar 17, 2021 1:19 PM
flytight -- the Fed is making that crucial decision which will impact bond prices and yields TODAY:
surfinusaMar 17, 2021 2:56 PM
Did anyone query the Fed (during the previous meeting's Q&A) about the SLR?
flytightMar 17, 2021 12:11 PM
In the last three months alone treasury holders have lost some 9% while holding Treasuries as we have seen the price of TN drop from a high of 159'115 to this morning's new low at 145'025, now sitting at support. I can't imagine what will happen if support is broken. You mention that the major banks are holding some 10%-11% of assets in Treasuries.
They and everybody else holding Treasuries have been severely beaten up over the last three months. Who will be left to buy Treasuries from the Government going forward if the Feds don't act to support these buyers that the Treasury so desperately need to fund ongoing deficits and stimulus paydays? Surely this cannot go on much longer can it?
Those who are buying including China as you mentioned must expect the yield to reverse direction at this time? Are they not buying for just this reason. Surely nobody is buying anticipating another 9% loss as a bondholder in the future. There is it seems no choice on the part of the Fed. How can this persist?
If you believe this must be resolves no later than month-end, and the SLR issue resolved in favor of the banks, then the trend of the market must be obvious to you. It seems to me we have a maximum two weeks window to position ourselves for this outcome. Seems to good to pass up, not sit back and watch it happen from the sideline. Do the Feds really have a choice this late in the game?
GOOD AFTERNOON EUROPE / GOOD EVENING WEST COAST
robert.p.balanModeratorLeaderOwnerMar 17, 2021 1:20 PM
New, post COVID-19 high in 10yr yield -- the MOTUs are either (1) forcing the Fed's hands, and/or (2) setting up retail (which includes CTAs) for higher bond prices (the pump), and then hammering the market after FOMC decision is released (the dump).
john.derMar 17, 2021 1:49 PM
4th trip to the trend line as flytight mentions above. Each time the trend line gets pushed a couple of ticks further. .... I'm guessing if this trend line now fails, all hell will break loose in the bond market.
flytightMar 17, 2021 2:26 PM
Ok, so TODAY is THE FED DAY! The sooner it gets done, the better! So the MOTUs have pulled back their slingshots and pulled down overnight the price of Treasuries to well below support. They will it seems let the marbles fly no later than 2:00 p.m. Bought a bunch of TN contracts near the low this morning. Just seems too opportunistic not to take these MOTU signals at face value.
We may well see wild swings today as RB's boss stated yesterday, but we need to look past that to the implications and direction that Treasuries and yields will take come tomorrow and beyond....
robert.p.balanModeratorLeaderOwnerMar 17, 2021 3:00 PM
Looking like a wave 4 of some kind, is due. . . but not clear.
john.derMar 17, 2021 3:44 PM
Wow. ... usually used to seeing volatility on Fed day after the press conference. Geez.
surfinusaMar 17, 2021 5:37 PM
So the banks have known for 1 year that March 31, 2021 is when their free-ride ends, and now they want us to believe that a calamity is upon us? Even without the SLR most banks would be fine. Plus they have had 11 weeks of topping formation this year on the indices to lock in their profit. Something tells me it is just a ruse to sell off. A game.
john.derMar 17, 2021 6:01 PM
The primary dealers are happy to create a calamity just to prove a point. They don't give a crap. They win either way.
RM13Mar 17, 2021 6:52 PM
Primary dealers have access to fed release 24-48 hours before the Fed statement release, they already know.. But it's how they position themselves for what follows that matters... So SLR deadline postponed or not?
TimK123Mar 17, 2021 6:43 PM
DXY in a triangle possibly, maybe wants to break downTimK123Mar 17, 2021 6:43 PM
nichaMar 17, 2021 6:54 PMIf you are taking a poll: yes, postponed.
robert.p.balanModeratorLeaderOwnerMar 17, 2021 7:01 PM
FED REMAINS SUPER-DOVISH, KEEPS RATE ON ZERO UNTIL 2023
NOTHING ON SLR
MOTUs making their initial move.
ptTL9Mar 17, 2021 7:07 PM
robert.p.balan are we staying away today too?
robert.p.balanMar 17, 2021 7:09 PM
I have no idea yet what this market is doing -- I will make a move when everything has settled down. I don't need to buy at the low or sell at the high. Never tried.
acetaiaMar 17, 2021 7:02 PM
In the stock market this past week, the rise of long-term interest rates weighed most heavily on the Nasdaq Composite, which mainly traded counter to moves in 10- and 30-year Treasury yields, owing to the greater impact of higher discount rates on cash flows expected in the distant future. Even so, the Nasdaq broke a three-week losing streak, ending up 3.1%.
Here's What Wall Street Will Focus on This Week as Fed Rate Panel Meets
sparketMar 17, 2021 7:05 PM
SLR news to come during the conference?
RM13Mar 17, 2021 7:08 PM
If he doesn't say the magic words 'SLR deadline postponed', bonds drop, so does tech..
ptTL9Mar 17, 2021 7:13 PM
RM13 just tech, or yields are up, DXY down and IWM and DOW up?
RM13Mar 17, 2021 7:19 PM
If no SLR postponement, no change in Fed policy, that means rates up ride continues, that would mean bonds/tech down, IWM/DOW/DXY up, that's my interpretation...
SPY will be a battle between tech megacaps and reflation narrative.
RM13Mar 17, 2021 7:45 PM
VIX over 20 now, lets see where it closes..
RM13Mar 17, 2021 8:04 PM
I guess Powell implied the magic words
If we close below 20 on VIX, I think we transition into new regime of under 20 VIX...
That would lift up SPY..
sparketMar 17, 2021 7:10 PM
Huge volume on NQ right now..
surfinusaMar 17, 2021 7:13 PM
VIX dropped (19.46 now)
surfinusaMar 17, 2021 8:56 PM
He did say that the inflation will perk up (circa 2%), although transitory, so wouldn't that push up the US10Y yield? Or is the 10Y assumed to have a longer view than the shorter term CPI ?
surfinusaMar 17, 2021 9:12 PM
This article proposes excluding reserves being counted as exposure, but including treasuries being counted towards exposure ...
To SLR Or Not To SLR - Fed Guy
robert.p.balanModeratorLeaderOwnerMar 17, 2021 7:11 PM
Equities going the way Beam's EWP work illustrated.
john.derMar 17, 2021 7:15 PM
Rates going nowhere.
robert.p.balanModeratorLeaderOwnerMar 17, 2021 7:15 PM
Yes, that's why I am leery of reading anything into current market action.
This is Gold (XAU) EWP schemata for a base action -- so watch out for whipsaws during the Q&A session.
timothy.r.kiserModeratorMar 17, 2021 8:35 PM
Summary: The economy will recover if the virus will go away!
robert.p.balanModeratorLeaderOwne Mar 17, 2021 9:15 PM
surfinusa -- Inflation is a problem next year, in 2022, not in 2021
Factors which drive the 10Yr Bond Term Premium and 10Yr Yield: CRB Index, Core CPI, Breakevens
The 10Yr Yield and the Breakeven Rate are creations of the 10Yr Bond Term (RISK) Premium
The Bond Term (RISK) Premium and Core CPI are impacted by the (lagged) changes of the Commodity (CRB) Index
surfinusaMar 17, 2021 9:42 PM
Thank you Robert. The CRB chart looks similar to the TNX chart, and it has a sharp upward trajectory (after the sharp fall-off last year), which seems to contribute a positive push to the TNX.
CRB Commodity Index | 1994-2021 Data | 2022-2023 Forecast | Price | Quote | Chart
CRB Index increased 25.96 points or 14.56% since the beginning of 2021, according to trading on a contract for difference (CFD) that tracks the benchmark market for this commodity. Historically, CRB Commodity Index reached an all time high of 470.17 in July of 2008.
robert.p.balanMar 17, 2021 10:13 PM
Here is the long chart with no lags. You don't see the fit.
Here is the chart where the CPI is set back 6 Quarters
Here is the chart with the GDP Implicit Price Deflator .. measure of internal "inflation" in the economy. Thats why I know Core CPI will bottom sometime in Q2 2021
surfinusaMar 17, 2021 11:12 PM
Thank you Robert. Agree that those charts show CPI lags.
surfinusaMar 17, 2021 11:19 PM
I was looking at the TNX since your analysis (correctly) places a lot of emphasis on TNX as far as its predictive ability on equities.
CRB seems to have done a C == A leg move up from 2020 bottom so far .
surfinusaMar 17, 2021 11:21 PM
The CRB track sTNX,
It could be that since both were beaten down so much mid-2020, that they are roaring back up fast (with lag of just 1Q) to some normal level.
For comparison, I was looking at the 10 year charts of CRB and TNX
10 year chart of TNX
surfinusaMar 17, 2021 11:25 PM
Thank you for the info on what drives the US10Y (my original question).
robert.p.balanMar 18, 2021 4:41 AM
"It could be that since both were beaten down so much mid-2020, that they are roaring back up fast (with lag of just 1Q) to some normal level." -- Here is the right context:
robert.p.balanMar 18, 2021 4:42 AM
10yr yield rarely stays very long above its regression line, unless the Fed is hiking the FFR . . . . . and the Fed never hikes the Fed Funds Rate during a recession. The fear about "surging yields" is merely "recency bias" . . .
surfinusaMar 18, 2021 4:52 AM
Thank you for the chart. Got it. Considering that the FFR is low (and expected to remain low for a year), the yield has already perked up above the red line, and I presume the deduction would be it is reaching the upper extent of its run-up. Additionally, in that case, I presume what the Fed does with the SLR should not affect the TNX as much. Am I correct?
robert.p.balanMar 18, 2021 5:02 AM
I published that chart at PAM more than two weeks ago. Nobody at PAM picked that up, except for you now. This recency bias and reliance on Twitter twits info bites often prevents a zoom out approach. So here is a case of twitterers trying to outdo (and outscare) each other in projecting how high the yields will go. I thought a historical presentation will present the correct scale and context of this "unprecedented" yield rise.
robert.p.balanMar 18, 2021 5:27 AM
The SLR issue has become politicized, that is why Powell was like treading on eggs while discussing it. The Dems do not want the exemptions to remain and want to end it ASAP. For whatever reason, I have no idea. Just probably hate the banks (except for their political contributions).
As Powell may still be hoping to be reappointed, he will probably agree to ending the exemption on March 31. That is why The FOMC decided to to raise the Reverse Repo counterparty limit from $30 Billion to $80 billion --- they are getting to ready to sop up that Treasury Cash Balance drawdown avalanche to less than $500 billion by June end (to comply with the law).
The Fed is looking at this RRP facility to help relieve the pressure on long term yields.
The market has probably just started to connect those dots -- that is why the yield is rising again.
*So there you are -- the exemptions will probably end on March 31. *
And there will be no Yield Cap Control -- it will be just ol' Reverse Repo which will be deployed to drain liquidity from the TCB drawdown flood.
surfinusaMar 18, 2021 5:36 AM
From my introductory understanding, the rationale for the SLR exemption was the lack of liquidity. Looking at the markets, liquidity does not seem to be an issue (quite to the contrary).
robert.p.balanMar 18, 2021 5:55 AM
Surf -- the Fed needed the PD/MOTUs to help monetize the humongous debt issuance of the Treasury. The PDs have to buy that debt BEFORE the Fed can monetize it and convert it into "money".
The PDs need capital to purchase these securities from the Treasury -- that is why the exemption was passed to divert the reserve buffer otherwise used to comply with the SLR to the purchase of Treasury debt issuance instead. It allows the MOTUs expanded balance sheets capacity to deal with the expanded "monetization" of US debt issuance.
Nothing to do with liquidity.
You may want to review this article I posted a few hours ago.
surfinusaMar 18, 2021 6:21 AM
OK. 'BEFORE' is the key word. In layman terms, the Fed is engineering the system and needed to grant the exemption to help with the engineering. As far as the banks go, they agreed to the engineering, and would complain if they have to do both (do the bidding and not get relief). I understand.
robert.p.balanMar 18, 2021 10:29 AM
Excellent!
Also, there are other implications --
As part of the deal to increase the MOTUs firepower in dealing with forthcoming large packets of debt issuance, the Fed also suspended the banks ability to do share buybacks.
What has happened is that the Fed now allows share buybacks, but still keeps mum on the extension of the relief on Treasuries.
If the SLR relief does NOT happen, then the banks will trim their balance sheets on all sides. They will shed Treasuries, bank reserves (also called Fed deposits) and even deposits. And the MOTU's will focus on share buybacks.
So for the life of me, I wonder why equities have the urge to fall when the Treasury relief appears to end as equties will become the destination and beneficiary of further leverage the MOTUs will do with the "newly available" capital. It is a TINA situation -- the banks have to max their leverage, and with the full requirements of the SLR renewed -- the only possibility are equities. So why equities fall in fear of the SLR's full implementation is still a mystery to me. Maybe someone can provide an explanation . . .
john.derMar 17, 2021 9:27 PM
Very leery that Powell did not want to present SLR resolution today. ... And, quite frankly, his tone of voice and body language was defensive when asked the question. Don't like it.
edouard.valysMar 17, 2021 9:37 PM
Robert you never talk about the correlation of gold copper ratio with 10 years. So far it is one of the best chart i ve followed since 2 years.
bogeygolfMar 17, 2021 9:41 PM
I kinda like this simplification of the SLR issue: “SLR in and of itself is not YCC, but it is a necessary condition to conduct YCC. The Fed can't be market makers of its treasuries, the banks do. Without SLR exemption, the banks can't hold more treasuries & make a market of the treasuries at a rate the Fed is targeting to buy.”
that's why Bitcoin, gold, silver all up today
SLR is necessary step toward YCC
surfinusaMar 17, 2021 9:49 PM
"the bank's can't" ? Or the "the banks won't" ?
[Disclaimer: Not an economist]. I am wondering whether the Fed induced QE pushing banks to hold (larger amount of) treasuries is a cause ... QEs have become a standard-operating-procedure the past decade.
paradigmMar 17, 2021 9:51 PM
Gee, how did the banks manage to be market makers in treasuries with the SLR in place before April 1 2020
surfinusaMar 17, 2021 9:51 PM
Exactly...
bogeygolfMar 17, 2021 10:04 PM
I said it was a *simplification* of the SLR issue, not a detailed explanation
robert.p.balanModeratorLeaderMar 17, 2021 11:00 PM
edouard.valys -- The reason why I don't use Copper/Gold ratio vs 10yr yield is that it is coincidental indicator, at best, and I do not see any utility for it as a forecasting tool.
riskuhnMar 17, 2021 11:33 PM
I trade the Copper/Gold ratio directly guided by emerging market GDP trends - Currently Long/Short. I will also vary the Gold portion cutting it in half depending on strength of gold on its own. In the context of PAM I am looking for any enhancements to this strategy. My guess is that the best indicator to follow would be the Total China Social Financing metric?
robert.p.balanMar 18, 2021 4:45 AM
The TSF gives you a good lead for Copper. The TCB gives you a heads up on Gold.
I will see you all in Europe trade Thursday.
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