Borrowing from the Fed to repair broken windows

August 25, 2020

–Rates were little changed Monday in front of today’s 2y auction, with yields unch’d to +1 across the curve.  In eurodollars, the two largest volume contracts, each at 112k, were EDZ1 and EDZ2.  There was a buyer of approx 35k EDZ1/EDZ2 spread for 3.5, which traded  up to 5 and settled 4.5.  Open interest was -19k in Dec’21 and +2.5k in Dec’22, so it may have just been a trade to roll shorts further out the curve.  In any case, I have attached a chart of ED5 to ED9 from 2007, the first red to first green, since Dec will be in the first quarterly slot within a few weeks.  While this spread has recently traded negative, most of its history has been substantially positive, and with the Fed dismissing negative rates, it seems like a buy at 3.5 doesn’t have a lot of risk.  The question becomes, “what are the odds for a rate hike in two years?”  A large one-year red/green calendar buy like this also occurred several months ago and appeared to have perfect timing as the spread quickly went from 5 to 12.5 (I believe it was June’21/June’22).  However, it just as quickly fizzled out to trade 3.  

–Bloomberg cites Credit Suisse: ‘Bonds no longer work to diversify stock risks’.  What risks?  

–New Home Sales today along with Consumer Confidence, followed by the two year auction.  

–Though the Fed’s website doesn’t appear to have updated, last week New York’s Metro Transportation Authority borrowed $450 million from the Fed’s muni facility at 1.92% for three years, initially having tried to sell into the market at a yield of 2.79%.  “Oh, I don’t like the price of the market, maybe I can borrow from the Fed sub-2% too.”  There is simply no reason the Fed should be lending to and subsidizing city services.  Of course, this story comes with an added twist, as many NY subway train windows have been recently smashed in unchecked vandalism.  Again, there’s no accountability in today’s public money flows.  I’m sorry to bring it up again, but this situation absolutely begs for reference to Bastiat’s broken window fallacy.  The Fed lending money to the MTA to repair broken subway windows absolutely does NOT help the economy.  When Guiliani was mayor, the police were instructed to focus on even minor crimes with high visibility and low arrest tactics.  These infractions included graffiti and other vandalism, turnstile jumping etc.  Guiliani was credited with cleaning up the city.  What typically isn’t mentioned is that economic conditions in general also contributed to a better quality of life, which makes today’s strife all the more complicated.,blow%20from%20the%20coronavirus%20pandemic.

How New York Became Safe: The Full Story | Restoring Order in NYC – City JournalThe Mounting Evidence That Broken Windows Works. Twenty-seven years ago, James Q. Wilson and I published “Broken Windows” in The Atlantic, proposing that untended disorder and minor offenses gave rise to serious crime and urban decay.We also hypothesized that government and community action to restore order might reduce
2 more incidents of subway windows being smashed, more than 400 have been broken April – ABC7 New YorkNEW YORK (WABC) — The vandal believed to be responsible for smashing more than 400 windows on subway cars since April struck again Friday night. Sources tell Eyewitness News that two more …

Posted on August 25, 2020 at 5:55 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply