July 3. Scarcer reserves and t-bill supply

“Gradually reducing the Federal Reserve’s securities holdings will result in a declining supply of reserve balances.”  From the Fed’s June 2017 addendum regarding Policy Normalization.

–Interesting article in WSJ on 1-July: ‘Fed faces decisions on shrinking is huge bond portfolio’ notes that reserves are becoming more scarce.  From the article,”…developments in short-term money markets of late raise the question of ‘how long we actually want our balance sheet [wind-down] to go,’ Boston Fed President Eric Rosengren said in an interview last week. It is possible the portfolio will not have to shrink “dramatically more” from its size of $4.3 trillion in June…”

–At least some members of the Fed are concerned about how to deal with the next downturn, and discussions about ending ‘normalization’ of the portfolio likely include this issue.  Note that QT in the just started Q3 is now in the amount of $40 billion per month, $24b in treasuries and $16 in MBS.  Another interesting policy article is on BBG: Forget the yield curve, the debt market action is in Fed funds.

https://www.bloomberg.com/news/articles/2018-07-03/forget-the-yield-curve-fed-funds-is-where-debt-market-action-is

“As the second half of the year gets underway, T-bill supply is poised to expand by another $290 billion, according to JPMorgan Chase & Co. estimates. Deutsche Bank AG expects an additional $185 billion of net bill sales, most of it arriving in the fourth quarter. ”

–It appears as if volatility may begin to increase in rate markets.  Yesterday, the curve flattened with 2/10 down to a new low of 31.7 bps, and 5/30 to new low 24.   Green to blue euro$ pack spread closed NEGATIVE 1.375.  New buyer of 25k 0EH 9687/9675/9662p strip covered; settled 37.0 vs 96.99.

–This morning the yuan hit a new low, but soothing words from the PBOC reversed the decline.  Crude oil at a new high this morning with CLQ +78 to 74.72.  Stocks higher.  Happy 4th!

Posted on July 3, 2018 at 5:19 am by alexmanzara · Permalink
In: Eurodollar Options

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