Market Mover - BNP PARIBAS - Investment Services India

More documents

Recommendations

Info

US: Fed Provides More Details on Exit Plan • Bernanke outlined several steps and programmes that will help facilitate the Fed’s exit strategy in his speech on Wednesday. • The Fed is to conduct reverse repos with not only dealers, but also money market funds and other counterparties. We would argue that GSEs are a possibility as well. 3 2 Chart 1: Fed Funds Target vs Effective Fed Target Rate Fed Effective Rate • By switching its policy target rate to the rate paid on excess reserves instead of effective fed funds, this should be mildly bearish for short-term rates. Again, GSEs are an obstacle to fully benefiting from this plan. • The Fed will offer term deposits and could now have greater control over 3m or longer rates by adjusting the supply of its offerings. • STRATEGY: We do expect some bearish impact on the 2-5y sector of the Tsy market. To be sure, Bernanke made it clear that there has been no policy shift (inflation subdued, rates to be held low for an extended period etc). However, the psychological effect of these measures will still be a factor as investors think twice about front-end carry/roll trades. 1 0 May-08 Aug-08 Nov-08 Feb-09 Jun-09 Sep-09 Dec-09 Source: BNP Paribas Chart 2: Commercial Paper to Remain Tight? 400 3m OIS vs ABCP Rate Spread 6 350 Fed Target Rate (R.H.S) 5 300 250 4 200 3 150 100 2 Bernanke outlined several steps that will help the Fed facilitate the unwinding of accommodative monetary policy. Some of these steps are not expected to have a noticeable impact, while the impact of a few programmes is unclear and warrants attention. However, there is no policy shift so one shouldn’t expect eventual Fed tightening to come any sooner than previously expected, although the impact on markets could nevertheless be bearish due to the symbolic nature of this detailed update on the Fed’s exit plan. Reverse repos with a twist Reverse repo operations by the Fed are nothing new. In fact, the Fed used reverse repos quite a bit in the beginning of the crisis to manage liquidity. By performing these transactions, the Fed drains cash out of the system. It is yet another tool for controlling overnight effective rates and keeping them closer to the target (Chart 1). What's new is that the Fed plans to perform these transactions with other counterparties besides primary dealers, albeit stopping short of identifying who those counterparties may be. Money market 50 0 -50 0 Jan-08 Jul-08 Feb-09 Aug-09 Mar-10 Source: BNP Paribas funds seem like good candidates, although they are already affected by the SEC’s recent ruling about shortening the maximum weighted-average maturity of a fund’s holdings from 90 to 60 days, which would weigh on demand in the longer end of the money market sector. Much of the assets bought in this sector are CDs and commercial paper. Chart 2 shows that the CP spread is very tight due to the Fed’s liquidity programmes although it may now start to widen. Paying interest on excess reserves…but at the target rate The Fed is currently already paying 25bp on excess reserves, although the effectiveness of this is hampered by the fact that GSEs still don’t get paid on reserves. GSEs are big players in the Fed Funds market and they are a major reason why the Fed lost control of the effective fed funds rate (Chart 1). We 1 Sergey Bondarchuk / Suvrat Prakash / Bulent Baygun 12 February 2010 Market Mover, Non-Objective Research Section 16 www.GlobalMarkets.bnpparibas.com
would argue that resolving this issue would help the Fed regain better control of overnight rates. In fact, the Fed might also be already considering reverse repos with GSEs, as it has not yet specified which counterparties are under consideration. Bernanke outlined a key change in the Fed’s approach which could help it gain stronger control of short-term rates. The Fed will shift its policy target to the rate paid on reserves instead of the fed effective rate during the early stages of tightening. Effective fed funds has occasionally been driven much lower than expected as the banking system dumps reserves in that market on days of excessive liquidity. This makes it difficult for the Fed to control effective rates during the early stages of rate increases. By protecting against unexpected plunges in the Fed effective rate, this should force an upward adjustment to OIS, GC and even Libor, although perhaps only slightly since most of the time there is not a dramatic drop in effective rates. Offering term deposits This isn't the first time a potential Term Deposit Facility has been mentioned by the Fed. The implication of introducing such a facility, especially ahead of rate hikes, is that it could give the Fed effective control of rates longer than 1m or even 3m. As another tool for draining liquidity, the Fed "plans to offer to depository institutions term deposits, which are roughly analogous to certificates of deposit that the institutions offer to their customers". By offering deposit out to (say) 3m, the Fed could arguably directly control the 3m rate, besides the traditional overnight fed funds rate. Although an argument can be made that investors will set the rate, the Fed could nevertheless influence it by adjusting the supply of its offerings. Therefore, if the Fed starts to use this facility before official rate hikes, it could at the very least increase volatility and quiet possibly push up short rates. Testing of the TDF is scheduled to start in the spring on a small scale, implying that the use of this facility will scale up as the economy improves. Therefore, considering that the Fed has hinted that liquidity draining exercises will ramp up before official rate hikes, we could see the potential impact on rates as early as mid-to-late spring. As such, carry/rolldown plays should be considered with this in mind. On discount window, TAF and TALF wind-down The Fed’s current outstanding discount window borrowing is down to USD 89bn from a crisis peak of USD 438bn. Therefore, the discount window is barely used despite the Fed’s intense promotion of the facility at the start of the crisis. The idea was that banks would be willing to borrow from the Fed in case Libor rates were higher, thus making the discount window a “cap in Libor”. This failed the test and so other liquidity programmes were needed. Thus, a raise in the discount rate is unlikely to increase Libor (or other short-term rates) although some investors will surely still regard this as a hawkish message. Likewise, we expect no noticeable impact from the wind-down of other facilities, such as TAF on 8 March and TALF on 31 March (30 June for CMBS collateral) as utilisation of these programmes has dwindled recently. Asset sales Lastly, security sales shouldn’t be a concern in the short/medium term, as the Fed doesn’t anticipate selling security holdings “at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery”. Bernanke has used very careful and measured language in providing a detailed update on the Fed’s exit plan. By filling in the holes in the plan, investors are now able to envision the exit path more clearly and some may even be bracing for hawkish messages at upcoming FOMC meetings/speeches. Thus, while Bernanke may insist there has been no policy shift, the market reaction in the coming weeks may prove otherwise. We stick with the bearish call we made at the start of the week. Sergey Bondarchuk / Suvrat Prakash / Bulent Baygun 12 February 2010 Market Mover, Non-Objective Research Section 17 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: gave a few specific details on the
Page 5 and 6: More clarity was given on the seque
Page 7 and 8: Sovereign Debt: Time for Europe to
Page 9 and 10: The PS is more likely to face in th
Page 11 and 12: outlook for GDP and inflation. So h
Page 13 and 14: On inflation, Riksbank’s language
Page 15: Spending on other areas never did i
Page 19 and 20: Ramifications for Rates, Swap Sprea
Page 21 and 22: EUR: Demand for ECB’s Liquidity S
Page 23 and 24: EUR: Peripheral ASW Curves Re-Steep
Page 25 and 26: JGBs: Wait for Price Dips in Q2 •
Page 27 and 28: Table 1: BNP Paribas' Inflation For
Page 29 and 30: Table 3: BNP Paribas' Inflation For
Page 31 and 32: Table 1: BNP Paribas Carry Analysis
Page 33 and 34: Update on curves 5/10y indices’ c
Page 35 and 36: Technical Analysis - Interest Rates
Page 37 and 38: Trade Reviews Options, Money Market
Page 39 and 40: leave the euro significantly lower.
Page 41 and 42: open for further measures if requir
Page 43 and 44: EUR/SEK has broken sharply lower th
Page 45 and 46: Economic Calendar: 12 - 19 February
Page 47 and 48: Key Data Preview 115 105 95 85 75 6
Page 49 and 50: Key Data Preview Chart 5: Italian G
Page 51 and 52: Key Data Preview Source: Reuters Ec
Page 53 and 54: Key Data Preview Chart 13: Norwegia
Page 55 and 56: Key Data Preview Chart 17: UK Retai
Page 57 and 58: Economic Calendar: 15 February - 12
Page 59 and 60: Next week's T-Bills Supply Date Cou
Page 61 and 62: Economic Forecasts GDP Year 2009 20
Page 63 and 64: Market Coverage Market Economics Pa

Market Mover - BNP PARIBAS - Investment Services India

Create successful ePaper yourself

Delete template?

Save as template?