极彩登录网址-【双语深度】美债外资大撤离：原因、影响以及未来的走向（下）admin 2019-05-24 共248人围观 ，发现0个评论
Part III – The Invisible Hand
Required moves of at least 100 bps are huge in both funding and fixed income markets – they would eclipse the size of the largest Libor-OIS moves we have seen since 2015, and they would also count as one of the largest moves in the 10-year yield seen since 2015.
So we could be in for some big moves in fixed income markets in 2019…
…and perhaps moves that are bigger than that. Hedging costs or the 10-year yield moving 100 bps does not leave much margin for error: foreign inflows would stage a “sudden stop” again for a few bps less. For foreign portfolio flows to structurally “stick”, hedging costs and the 10-year yield would have to adjust by more like 100 to 150 bps.
How can the curve re-steepen from here relative to hedging costs?
Within the confines of U.S. funding and fixed income markets, the required steepening can come from two and only two sources: higher Treasury yields or lower hedging costs. In turn, these adjustments can happen either through marke玉势ts adjusting themselves – “the invisible hand” – or markets adjusting with some help from the U.S. government.
In this part of our analysis, we consider the scenario where markets do the adjustment, and in the next part of our analysis, we consider the scenario where the government helps.
Let’s first consider how the adjustment could come from higher 10-year yields.
Figure 20 shows that the 10-year Treasury yield would have to be at least 3.50% for FX hedged buyers from Japan and Europe to consider 10-year Treasuries to be attractive relative to government bond yields available locally, given no change in FX hedging costs; the minimum yield target of large U.S. banks and funds to stay are also about the same.
As noted above, these are minimum yield targets w极彩登录网址-【双语深度】美债外资大撤离：原因、影响以及未来的走向（下）ith no room for error, and so for foreign investors and for U.S. banks and asset managers to steadily buy on the margin, the 10-year yield would have to be around 4.00% – a level it hasn’t reached since 2007.
If the 10-year trades above 4.00% it probably won’t mean anything good for either equities, credit or the economic outlook. The technical reasons why yields could gradually grind toward 4.00% we have discussed in the previous sections: more supply due to growing deficits and the Fed’s balance sheet taper; foreign investors’ buyers strike; banks unwilling to buy Treasuries outright or an asset swap at current yields for HQLA; banks buying foreign bonds on an FX hedged basis to earn a spread over Treasuries; and asset managers’ current incentives to fund banks rather than the U.S. government and also to fund foreign governments on an FX hedged basis rather than the U.S. government.
In addition, primary dealers trying to move Treasuries off their books will also pressure yields higher as they cut the price of Treasuries to make room for future auctions, where they’ll likely bid for paper at higher coupons to protect themselves from repo rates rising.7
There are also some macro reasons why the 10-year yields can move higher from here: assuming that the current IP slump bottoms during the second quarter (see here), improved indicator flows and risk sentiment can prompt the market to expect hikes again, and the Fed can turn hawkish again with a turn in risk sentiment, as the year progresses.
To be clear, we are not saying that the 10-year yield is going to 4.00%, only that forces both technical and macro could easily force it in that direction as the year progresses.
Let’s now consider the case where markets still adjust alone, but the adjustment comes not from a higher 10-year Treasury yield, but rather, lower three-month hedging costs.
Figure 21 shows that three-month FX hedging costs can be at most 2.00% for FX hedged buyers from Japan and Europe to consider 10-year Treasuries to be attractive relative to government bond yields available locally, given no change in the 10-year yield; the minimum yield limit on the dollar-lending leg of U.S. banks and asset managers that lend dollars for euros and then invest in French government bonds is also the same.
As noted above, these are maximum hedging costs with no room for error, and so for foreign investors to be back and for U.S. banks and asset managers to structurally stay, hedging costs would have to be below 2.00% – i.e., well below the Fed’s target range.
If the Fed doesn’t cut rates, how could hedging costs fall below the Fed’s target range? Through the cross-currency basis going positive.
There are three distinct flows can push cross-currency bases to go positive this year.
First, foreign portfolio investors’ demand for dollar assets on a hedged basis has peaked, and with less demand for dollars come less negative bases (see part one above). Reduced demand comes from both less foreign inflows into dollar assets on the margin, and foreign investors selling dollar assets and buying back dollar hedges on the margin.
Second, despite the diminished demand for dollars in the FX swap market on the margin, supply remains robust as lenders of dollars care about spreads over bills, which for some types accounts – namely global banks and foreign central banks – remain significant. This ongoing lending of U.S. dollars in the face of shrinking demand has pushed the core cross-currency bases all the way to zero – with some now trading positive (see Figure 22).
Third, what can tip some bases to trade more positive from here is if the lending of dollars accelerates as U.S. banks and large asset managers lend more in the FX swap market as described above – i.e., if U.S. accounts, like Japanese banks and insurers in recent years, go from lending the local currency, in this case the dollar, on the margin to dumping it and start borrowing euros to buy steeper government curves in Europe and even Japan.
Figure 23 shows how such flows would re-shape the dynamics in the FX swap market. Thus, in 2015-2016 the backdrop was an excess demand for U.S. dollars via FX swaps which banks arbitraged by borrowing U.S. dollars secured and unsecured on the margin.
Then, in 2017-2018 the dominant theme was less demand and more lending, and so more balanced flows – a market that increasingly cleared through matched books, where banks did not have to arbitrage as much, which freed up balance sheet for repos.
Next, 2019 could be the year where U.S. banks and asset managers dumping dollars in the FX swap market to get around the flat Treasury curve tip the market to the point where there is an excess supply of U.S. dollars – the opposite of flows in 2015-2016.
If cross-currency bases go positive, arbitrage trades will be very different.
Instead of borrowing dollars in the CD and CP markets to lend into the FX swap market on the margin, banks will be borrowing in euro, yen, sterling and Swiss francs and then lend these currencies and borrow the excess U.S. dollars floating in the FX swap market.
Positive cross-currency bases would thus gradually pressure Libor-OIS to trade tighter, and as the borrowers of excess dollars look for places to invest, stressed repo markets and an excess supply of Treasury bills trading above OIS will be natural places to invest.
30 bps from positive cross-currency bases, 30 bps from a tight Libor-OIS spread and 30 bps from bill yields below OIS as arbitrageurs buy bills to invest excess U.S. dollars – these are the forces that together can easily push hedging costs 100 bps lower this year.
Part IV – Inversion and the Room to Taper
第四部分 - 倒挂与缩表空间
Clearly, markets are able to adjust on their own, and some of these "healing" flows are already in train: cross-currency bases are breaking through the zero line with some trading positive already; three-month U.S. dollar Libor-OIS spreads have come in on the margin; persistent flows from Japan and lately also from the U.S. have been pushing the yield on 10-year French government bonds lower; and large U.K. banks harvesting a positive sterling cross-currency basis have been lending into the stressed repo market in the U.S. as a part of a trade where they soak up excess U.S. dollars in the sterling swap market.
Figure 24 shows the constellation of curves when misalignments were at the peak. Figure 25 shows the constellation of curves today – the market is adjusting as we speak. So far so good, but which of the two scenarios will dominate the remainder of the year?
Of the two macro scenarios discussed above, its better for risk assets and the outlook if hedging costs trade down to 2.0% than if the 10-year Treasury yield trades up to 4.0% – it is better if the curve bull steepens rather than bear steepens relative to hedging costs.
Why a macro investor should care about which of these scenarios will dominate is clear, but should the U.S. government – either the Treasury, or the Fed, or both – also care?
We think the answer is yes.
First, Treasury should prefer funding strategies that lower the government’s funding costs, and in the current environment issuing fewer bills and more coupons would do just that: it would steepen the curve relative to hedging costs and raise the odds that the curve re-steepens the right way from the perspective of the Treasury – i.e., that the adjustment would come mostly from lower FX hedging costs, rather than higher long-term yields.
Historically, bill yields always traded about 30 bps below OIS, but recently they’ve been trading north of OIS. This is due to the massive supply of bills that was issued in 2018 under the assumption that we still suffer from a bill shortage. This assumption is wrong: the world now suffers from a glut of bills (see here), which contributes to hedging costs being much higher than necessary and the curve being inverted relative to hedging costs. Lower bill yields from less issuance would mean more lending in the FX swap market on the margin, which would help push cross-currency bases trade positive (see above).
Why the sovereign should shift issuance away from bills toward coupons is thus obvious: if she doesn’t, the flatness of the curve will worsen and funding can get more expensive.
Second, the Fed should also care about the flatness of the Treasury curve for it affects how much room it has to taper and how soon it will have to launch an o/n repo facility.
As discussed in part one of our analysis, primary dealers’ inventories have increased by $200 billion since mid-2018, due to increased federal deficits and taper (see Figure 10).
Most of this increase in dealer inventories was funded by large U.S. banks swapping reserves for o/n repos in HQLA portfolios on the margin, and at rates well north of IOR.
According to their fourth quarter financials, J.P Morgan Chase Bank and Bank of America were the only two banks that lent into dealers’ increased funding needs on the margin, which shows that the repo market currently relies on two banks to clear (see Figure 26).
This is important to appreciate because it implies that there is a fine balance between the size of primary dealer’s inventories of Treasuries and these two banks reserve balances – once these two banks lose their flexibility to toggle between reserves and o/n repo freely, the repo market could lose its lenders of next-to-last resort, primary dealers would scramble to fund their inventories and o/n rates would drift outside the Fed’s target band.
The Fed would have no choice but to suddenly end taper and launch an o/n repo facility – which we believe it doesn’t want to.
The Fed should thus care about the slope of the curve as it impacts the room to taper.
A flat curve means no interest in Treasuries, growing inventories, growing repo pressures, and large U.S. banks’ reserve balances being pushed to the limits of their flexibility.
A steep curve means that auctions go well, dealer inventories clear and that pressures in o/n markets – the markets which ultimately determine the room to taper – disappear.
What can the Fed do to maximize the scope of balance sheet taper and delay the launch of a fixed-price, full-allotment o/n repo facility? What a pilot does when a airplane stalls.
When an airplane stalls you push its nose down…
…so that the airplane goes faster and more air flows over the wings which helps create enough lift for the plane to start flying again. The same with the flow of Treasury collateral.
Like with an airplane in deep stall, the best course of action for the Fed is to push down the nose of the U.S. rates complex – three-month funding rates – and push it down hard.
The Fed can do one of three adjustments, in our view:
reverse twist the SOMA portfolio,
cap the foreign RRP facility, or
cut interest rates.
First, a reverse twist would steepen the curve and enhance the flow of Treasury collateral similar to the way Treasury issuing fewer bills and more coupons would (see above). Lower bill yields from a reverse twist would mean more lending in the FX swap market on the margin, which would help push cross-currency bases trade positive (see above).
Second, capping the foreign RRP facility would force $250 billion worth of FX reserves currently on deposit at the Fed to flood into the bill market and/or the FX swap market – flows that big would push cross-currency bases go very positive, very fast, which would accelerate the adjustm极彩登录网址-【双语深度】美债外资大撤离：原因、影响以及未来的走向（下）ent process we discussed in the previous section (see Figure 27).
Why the Fed should seriously consider options number one and two if it does not want to cut rates is clear: implicit in our analysis is that whatever force keeps the yield curve flat, from a plumbing perspective, the Fed overdid the hiking cycle by about two or three hikes!
The nose of the plane got pulled too high. The plane stalled.
The plane stalled, because the importance effective funding rates like FX hedging costs and spreads to OIS were ignored – see From Exorbitant Privilege to Existential Trilemma – as was the shift from funding the U.S with price insensitive to price sensitive buyers.
To be clear, we are not saying that the amount of rate hikes to date was incorrect – they are wholly consistent with the performance of the economy and the dual mandate.
What we’re saying is that from a plumbing perspective, hikes led to an aerodynamic stall: rate hikes pushed hedging costs too high and flattened the Treasury curve too much relative to other core curves. From a plumbing perspective the Fed hiked a little too much.
The system is constantly evolving and central banks must evolve too.
Some of the new things the Fed should consider when setting rates are these very topics. Balancing rate hikes, politics and the dual mandate was never eas极彩登录网址-【双语深度】美债外资大撤离：原因、影响以及未来的走向（下）y, but it was necessary. Balancing taper versus global curve slopes won’t be easy either, but it will be necessary.
Conclusions – The Path of Least Resistance
What will be the most likely path of adjustment?
Despite the arguments in our analysis as for why Treasury should adjust its approach to debt management and why the Fed should reverse twist and cap the foreign repo facility, we do not expect either Treasury or the Fed to announce any changes on these fronts.
The reason why we do not expect any change from either institution is because bill supply will be down during the first half of 2019, which should drive yields marginally lower, cross-currency bases marginally more positive, and Libor-OIS marginally tighter. Both the Treasury and the Fed are slow-moving institutions that like to wait and see, and they will wait and see how the marginal reduction in bill supply works its way through the system.
This means that during the first half of the year, the bulk of the adjustments will have to come either from higher yields or cross-currency bases to U.S. dollar Libor going positive.
Higher yields are unlikely as the global IP cycle will trough during the second quarter, which means the market won’t discount rate hikes and the Fed won’t turn more hawkish before the second half of 2019, in our view (see our House View on interest rates here).
That leaves positive cross-currency bases as the path of least resistance…
The three-month €/$ cross-currency basis trading positive this year will be a key piece of the puzzle of how the U.S. Treasury curve will re-steepen relative to European curves.
Just as a negative cross-currency basis served as the “equalizer” of global curve slopes when the Treasury curve was the steepest curve globally (see part one of our analysis), a positive basis will serve as the equalizer now that it is curve is the flattest globally.
Positive cross-currency bases are not unicorns…
…the /$ basis has been trading positive since 2018 and the Swiss franc/$ basis has recently turned positive too. More and more bases going positive means more issuance in sterling, Swiss franc and euro and less issuance in dollars, which means less pressure on U.S. dollar Libor-OIS spreads. If we are right, and the Treasury curve will re-steepen mostly through cross-currency bases going positive, then U.S. dollar Libor-OIS spreads can go as tight as 10 bps by June, which is 15 bps tighter than what the market expects.
Positive cross-currency bases and tighter Libor-OIS spreads come with lower bill yields as the borrowers of excess supply of dollars in the FX swap market look for a place to invest, much like the borrowers of excess yen and euro looked for places to invest two years ago.
Whether these adjustments will lower hedging costs by the required 100 bps fast enough for primary dealer inventories to clear as Treasury supply gathers pace is the big question.
If they don极彩登录网址-【双语深度】美债外资大撤离：原因、影响以及未来的走向（下）’t, o/n repo rates could continue to trade stressed and the Fed will be forced to end taper early and will soon have to launch a fixed-price, full allotment o/n repo facility.
If the Fed doesn’t want that, it will have to accelerate these adjustments and push the “nose of the plane down” – eithe极彩登录网址-【双语深度】美债外资大撤离：原因、影响以及未来的走向（下）r via a reverse twist or by capping the foreign repo pool. Either would push bill yields much lower, cross-currency bases much more positive and Libor-OIS much tighter than before – under this scenario our Libor-OIS target is -5 bps.
Either of these outcomes suggests that after a decade of absence, this is the year when the Fed will become an active lender in o/n repo markets and/or an active buyer of bills.
And what a difference a decade makes…
…we went from a Fed that had to buy Treasuries on the long-end to support risk assets, to a Fed that now has to buy bills on the front-end to support Treasuries on the long end.