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6 Apr, 3 tweets, 2 min read
Some notable reversals in rates over the first two sessions of this week 👀

The OIS curve, which had been steepening sharply on rising expectations of sooner Fed tightening has now pulled back from the peak on Friday to about where it was a week ago...
In the Treasury market, where the 5yr had been underperforming the ends of the curve dramatically since Feb 25, there has also been a strong countertrend move.

The 2-5-10 and 2-5-30 bflys have now fully retraced the rally after the strong March job numbers on Friday...
Finally in swap spreads, the rally off the March 19 SLR announcement also seems to be reversing slightly.

For now I see these all as corrections in a larger trend but imo may signal that some themes in rates markets are near-term a bit stretched...

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More from @AnalystDC

DC Profile picture
18 Mar
Short-end looking steady today despite some bill redemptions... RRP was bid heavily ($26.5B+) but bills did not go more -ve! This is a sign to me that besides friction, there is confidence now to arb -ve bill yields and keep them under control given the upsized RRP facility...
The issue here was always one of arbitrage capacity, as the Fed sets rates it pays on reserves (IOER in red) and repo (RRP in green) so dealers can arb the Fed Funds rate and bills/repos, respectively. The FF/IOER arb has unlimited capacity but the RRP arb was capped until now...
Now that the RRP cap per counterparty more than doubled, bill yields (white) and repos (yellow & blue) should not drop far below RRP just like the Fed funds rate does not drop far below IOER. Large RRP takes from here on out will simply confirm that the arb is occurring smoothly.
Read 4 tweets
DC Profile picture
4 Mar
Currently a "short-squeeze" going on in some USTs so let's go over what this all means.

No, the 10yr won't open at -3% tomorrow. But, if you borrowed the 10yr in the repo market to go short, there is now not enough 'borrow' in some specific issues to roll your short position:
Since it's mainly affecting the on-the-run 10yr issue, I assume traders were happy to lend cash or other securities against that specific bond in repo (called a 'special' vs general collateral repo) and sell it short. Now, they must cover or pay the 3% fail-to-deliver penalty:
However, this is only a problem for a few repo traders caught with 'special' positions they would rather roll to avoid dealing with a fail-to-deliver. Once the they sort out their books for the day, this 'squeeze' will be over. There is however something else concerning here...
Read 5 tweets
DC Profile picture
23 Feb
Interesting story going on with this Infinity Q fund, so let’s go thru the details before theories go crazy on this. The request for relief here may seem ominous - a fund can’t calculate the value of 1/5 of it’s portfolio - but this may not be as big an issue as it seems 👇 Image
Infinity Q was pricing swaps based on a 3rd party model, common in funds holding illiquid or OTC assets like this (or some will get a 3rd party to validate in-house models). Problem here is the CIO made some unauthorized changes, so the swap valuations cannot be approved... Image
The solution they have is reasonable I think: Freeze redemptions of the fund, since it is unknown if the CIO’s changes would reflect a fair value of the assets, go thru the model and fix it, and then liquidate the fund in a controlled manner... Image
Read 4 tweets
DC Profile picture
22 Feb
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 👇

securitiesfinancetimes.com/securitieslend…
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... 🤔🧐
Read 5 tweets
DC Profile picture
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
DC Profile picture
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...

reuters.com/article/us-chi…
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

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