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22 Feb, 5 tweets, 3 min read
Anecdotal evidence that $20B inflow of UST to LU in Dec 2020 was indeed Clearstream. If this is all prepping for a boom in their securities finance business, we should perhaps beware of new $CNY pumps coming online near term 👇

tldr of why this is relevant to $CNY pumps. The chart has 4 lines that seem related, but only 3 should be. CNYUSD (white) should be supported by China’s broad dollar assets (UST proxy in yellow) and leverage ratio of the major Chinese banks (red)...
However since Sept 2019 China’s gross UST holdings and the reserve ratio have gone down, both CNY bearish, while CNY itself has gone 🚀🚀🚀 alongside UST holdings of Belgium & Luxembourg (orange & green). This is the ultimate mystery here... 🤔🧐
I suggest, however, that this mystery may be simpler than it looks. If we look at the Euroclear brochure for banks and broker/dealers it gives us a perfectly rational reason to do so next to the ✈️ logo: “Making the most of your collateral”

Since UST collateral can be much more effectively leveraged at an international depository like Euroclear or Clearstream, the intuition here is that moving it into position in BE and LU may mean more violent pumps coming soon. Something to watch 👀

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More from @AnalystDC

7 Feb
Some more detail on the recent repo crunch in China. The key here is that the month-end bottleneck was not huge relative to recent history. This means, as suspected, the real problem is in $ funding. China’s banks did not have the $ liquidity to cover the end of Jan as usual...
Since PBOC has followed a policy of keeping official FX reserves flat in recent years, it appears that they are trying to solve the problem thru off-the-books $ swaps (thus the movement of collateral to Belgium to secure these swaps, as I have observed previously)...
The repo crunch, and recent slowing in Chinese purchases of $-denominated commodities (see copper below) gives some evidence that these sources of $ may be starting to dry up...
Read 4 tweets
31 Jan
While I was distracted with the $GME drama, it appears that not all has been calm in China's repo market, with repo rates in the overnight market spiking to levels not seen in quite a few years...
This article has a pretty good background on what is happening and normally I would just leave it at that, since the details of PBOC's monetary policy are as opaque to me as they are to most other people, but a few points caught my attention...

The fact that the shock seems to have been most severe in HK immediately raised an eyebrow, as there have been a few other recent events in HK I had been keeping an eye on...
Read 7 tweets
28 Dec 20

Been sitting on this one for a while, but in the spirit of the season, let's take a look at the strange and exciting world of commodity based repo-like transactions and do some unwrapping! 😉
The rise in prominence of Islamic finance institutions, and conversion of some key EM players into fully Islamic banks has made funding transactions complying with Islamic finance conventions a fast growing market:

It is general consensus among Sharia boards that deferred payment for the sale of hard assets does not equal the payment of interest & thus permissible for Islamic finance institutions. This forms the basis of the commodity murabaha, often the default structure in these markets:
Read 10 tweets
15 Sep 20

Once again, Bloomberg gives us a mental gymnastics clinic in their urge to twist any data series into a bullish headline. This time, it's global auto sales. But is the data really bullish? Let's see for ourselves! Image
At first glance, what they are saying is objectively true. Looking at auto sales in the US + EU + China, August 2020 was indeed the best August on record so far. But does a single month make a bullish trend? Let's take some deeper cuts at the data! Image
First, auto sales data is highly seasonal, so let's smooth it by summing over the trailing 12 months. Immediately, we see that something else is at play here. Sales peaked in Sept 2018 (coincidentally, right around when yield curves started inverting and macro turned bearish). Image
Read 8 tweets
13 Aug 20

Some time ago I went over a recent $TSLA ABS transaction and pointed to some interesting residual value stuff that was going on in the deal. WELL, THERE'S AN UPDATE! First, remember what the issues with the deal were:
To recap, a large part (56%) of the value of the deal would come from the residual value of the leased cars. Additionally, Moody's was concerned that residual value data from auctions was unavailable and most of the info was coming from resale channels controlled by $TSLA.
Okay, but who was actually providing the residual value figures used in the deal credit analysis? That job was done by ALG, a data service owned by a small NASDAQ-listed company TrueCar. Note that both $TSLA (through finance subsidiary TFL) and Moody's reference the ALG figures
Read 7 tweets
5 Aug 20
1/x: Okay, so we want to understand how to rate the credit risk of a CLO. First, let's start from the basics: What does a CLO mean? As shown in this very helpful diagram courtesy of the SEC, a CLO is a type of ABS backed by secured corporate loans (usually of junk rating):
2/x: The portfolio of loans is packaged into an entity that issues bonds to investors, mostly with significantly higher ratings than the loans in the underlying portfolio. Now, how do we analyze this thing? Seems very complicated, right?
3/x: Well, not so much. The key to rating a CLO is to come up with a default distribution for the underlying portfolio. Namely, to answer the question "What is the probability that x% of the portfolio defaults?". Once we have that, the rest is a piece of cake.
Read 21 tweets

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