You know that rattling noise under the hood of the US government securities market? Well, the Treasury Department’s regulatory recommendations from last week should help fix it.The suggestion that regulators tweak the supplementary leverage ratio (SLR) has already moved markets, according to Credit Suisse — see Figure 2 below, on the right:As it stands now, the SLR is a blunt instrument, by design.It requires all banks to add up their assets and make sure they have at least 3 per cent of that amount in equity capital, or 5 per cent for global systemically important banks. The issue with this framework is that it treats a Treasury bill the same way as a junk bond, which has a vastly different risk profile. As Robin Greenwood, Sam Hanson, Jeremy Stein and Adi Sunderam wrote in a February

Something odd is happening in the credit market, as UBS points out today: One narrow set of investment-grade bonds are yielding more than a group of junk bonds.As a general rule, that shouldn’t happen. Investors typically earn higher yields in the junk-bond market, as a form of compensation for the higher probability of default.So how to explain it? Well, we’re talking about bonds maturing in 10+ years, issued by companies with the lowest credit rating in the investment-grade category (the worst of the good credits). They yield more than the bonds rated one tier below them (the best of the bad credits), which have an average maturity of seven years.Comparing the two is a bit tricky, since the bond maturities don’t match up. More on this shortly.But even so, this occurrence is historically

You’ve probably heard this on cable financial news: A talking head defends his bullish view by citing the “Fed model”.The model — which is not endorsed by the Federal Reserve, by the way — says equities are cheap when there’s a wide spread between earnings yields and Treasury yields. And Goldman Sachs analysts said in a recent note that it’s getting attention, because of the 5-per-cent earnings yield on the S&P 500 and the 2.2-per-cent yield on 10-year Treasuries.But the logic behind that metric is fuzzy, to say the least.First of all, while both numbers are called “yields”, they measure completely different things. Earnings yield measures the corporate profit per dollar invested, so it’s kind of like a productivity gauge, if the world were made up of only companies and equity investors.

The Treasury Department has asked Congress to give it more control over the Office of Financial Research (OFR).And if Steven Mnuchin & Co. have their druthers, they’ll be able to (1) determine the OFR’s budget (2) appoint its director and (3) remove him or her at will.By all appearances, this is a very bad idea. The OFR is an autonomous research office that monitors financial risk for the Financial Stability Oversight Council, and helps inform its policy decisions. While its director is chosen by the president, the appointment requires Senate approval and comes with a six-year term, which should provide a shield from partisan pressure.Handing the OFR’s budget and staffing decisions to Treasury would remove that independence. Bluntly, OFR’s staff would have to think very carefully before

When the Federal Reserve starts shrinking its securities stockpile — expected later this year — it doesn’t want to cause too much market volatility.So instead of selling bonds, they decided to stop reinvesting principal from maturing bonds. Easy, right? Well, not exactly. Another puzzle was how they’d deal with the uneven schedule of securities maturing, which Bloomberg reported in April.Their solution to that is a system of caps, which we learned more about today.To start, the Fed will “keep” (though not, like, for themselves) up to $6bn in principal from maturing Treasuries, and reinvest any principal above that. For mortgage-backed securities and agency debt, that figure will be $4bn at first. Those limits will rise over time, until they reach $30bn and $20bn, respectively.From a Fed

The US Treasury’s recommendations for financial regulation generally look like a reasonable banker’s wish list — not an Elizabeth Warren proposal, but not unexpected.It’s important to keep in mind that most of them can’t be implemented by Treasury alone. In fact, many require Congressional approval, so their future is far from certain. (For example: Moving the Office of Financial Research into Treasury, loosening capital requirements for community banks, and reducing the power of the Consumer Financial Protection Bureau.) They also don’t constitute formal proposals.Still, there are some key changes that only require the cooperation of the Federal Reserve and bank regulators. And that’s more likely, because of personnel turnover.Daniel Tarullo has left the Fed, so a Republican president

Back in February, Citigroup analysts said Qatari sovereign bonds should outperform the debt of a state-owned company there. They changed their minds this week.When they introduced the trade idea, the long-term debt of the company — Ooredoo, a telecom that’s 79-per-cent government owned — was trading at a premium to the sovereign bonds of the country itself. For fairly obvious reasons, the debt of state-owned companies normally trades at a discount to the debt of the state itself. So Citi predicted the relationship would return to normal.But there are limitations to every rule. For example: Governments are more creditworthy than companies they own and govern — unless the government in question finds itself in the middle of a diplomatic crisis, and subject to blockades or other sanctions.In

Well, there it is.The British pound was near $1.28 at last check after exit polls showed the UK could be heading toward a hung parliament. From Reuters:To be fair, this is just the exit poll data, so the Conservatives could still end up with a working majority.A bit more commentary from the inbox — this from Berenberg economist Kallum Pickering:Even if the exit polls have underestimated support for the Conservatives, and, in the end, they manage to secure a small working majority, this is a major embarrassment for Theresa May who called the election just a few weeks ago on the back of a commanding 20+ poll lead. Even if May manages to cling on to a majority, we see a real risks that her leadership is challenged, especially following an unsuccessful election campaign that has managed to

A prominent Twitter investor is worried about an entity that spends more than it takes in. After all, the platform hasn’t had a single profitable quarter by GAAP standards since it went public five years ago.But Twitter isn’t the entity Mary Meeker is thinking of. Nor is it notorious cash-burners Uber and Snapchat — other Kleiner Perkins Caufield & Byers investments.Instead, Mary Meeker is concerned with what she calls “USA Inc”, at the end of her latest internet trends report.There are a number of problems with this. First, she defines “USA Inc” as the US government, rather than the American economy. She also chooses to analyse this government — a global hegemon that has gone unchallenged for almost 30 years — solely by looking at tax receipts and spending.Meeker clearly does not read

This is part of an irregular series about US states‘ fiscal issues. Tammany has raised a good many salaries… don’t you know that Tammany gains ten votes for everyone it lost by salary raisin’? The Wall Street banker thinks it shameful to raise a department clerk’s salary… but every man who draws a salary himself says: “That’s all right. I wish it was me.” And he feels very much like votin’ the Tammany ticket on election day, just out of sympathy.— Plunkitt of Tammany HallThe quote above is from the infamous Tammany Hall political machine in New York.But these days it could describe Illinois, where the budgeting process has devolved into a scramble to ensure “a good many salaries” for each party’s voting base.The state has gone 23 months without a budget, and now has a $14.6bn backlog of

The federal government’s tax collections haven’t been growing much recently. That could be a warning about the health of the American consumer and, by extension, corporate earnings.It also has some implications for the Treasury’s upcoming collision with the debt ceiling.Until recently, analysts were forecasting a hard deadline of October. But White House budget director Mick Mulvaney said last week that tax receipts have risen less than expected this year, and warned the ceiling would therefore be breached in August without any policy changes.The data appear to support Mulvaney’s point. Treasury Department reports show that federal tax receipts declined year-over-year in the second half of 2016. That’s the first time they’ve fallen over a six-month period since the recession. (Receipts

Yes, this is about bitcoin.Henry Blodget–who received a lifetime ban from the securities industry after promoting garbage dot-com stocks –has been talking about bitcoin on TV. He said it’s the “perfect asset for a speculative bubble,” and “it could literally go to a million”, or zero.That’s not wrong! But his phrasing sounds like a clarion call for day traders.Telling a daytime financial TV audience that a risky trade could have “1000x” upside is like telling a sky-diving convention that they should only try base jumping if they’re really brave. (Sure, you could die, but there’s INFINITE adrenaline upside!)Cointelegraph didn’t see it that way, and essentially accused him of flip-flopping.Happy Friday, everyone.

Consumer delinquency rates probably aren’t gonna fall from here, if you know what I mean.Auto loans have been the big consumer-credit worry this year, after defaults and car repossessions rose, but that panic has subsided a bit as it’s become clear delayed tax refunds were behind some of the trouble. It was kind of confusing that people thought that would be the early sign of consumer trouble. Missing a car payment seems like a bigger deal than missing, say, a credit card payment, right?And what do you know: last month, bankcard defaults rose to the highest rate since mid-2013, back when default rates were declining from their financial-crisis peak, according to S&P/Experian indexes. The absolute rate isn’t high (3.35 per cent), but the increase is notable for a couple reasons. First,

From the Fed’s May meeting minutes, with our emphasis:Under the proposed approach, the Committee would announce a set of gradually increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month, and only the amounts of securities repayments that exceeded the caps would be reinvested each month. As the caps increased, reinvestments would decline, and the monthly reductions in the Federal Reserve’s securities holdings would become larger. The caps would initially be set at low levels and then be raised every three months, over a set period of time, to their fully phased-in levels. The final values of the caps would then be maintained until the size of the balance sheet was normalized.Let’s not forget that the New York Fed’s

Here’s another reminder, this time from New York Fed staffer Lorie Logan: While the Federal Reserve plans to cut the size of its balance sheet, it probably won’t end up shrinking that much.Even before the Fed addresses the tougher questions — how it wants to control interest rates, and who it wants to trade with — the balance sheet should probably be around $2.1tn, Logan says. (For context, the Fed currently owns about $2.5tn of Treasuries and $1.8tn of mortgage-backed securities.)With our emphasis, and explanation in brackets:In projecting the size of the normalized balance sheet, one can make assumptions about the long-run trends that will determine future levels for each of these non-reserve liabilities, subject to various kinds of uncertainty. Even taken at today’s levels, the TGA [the

Information is a funny thing: More is usually better. But once there’s enough data out there, only specialists have the time and ability to parse it. At that point, those specialists are the only ones who can turn information — YOUR information, usually — into profit.That’s true for the internet, and it’s true for electronic financial markets as well, since they’re basically ultra-fast standardised platforms for information exchange. Really, markets even had their own a version of the “fake news” panic.Anyway, once CME Group rolls out a new data feed on its US exchanges this weekend, investors trying to conceal large trades could be at an informational disadvantage. First of all, the new offering involves a much higher volume of data, industry sources say, which requires up-to-date

Jon Corzine is asking people for money.Dealbook reports he’s fundraising for a hedge fund. The last time Corzine ran a financial firm, $1.6bn of client funds disappeared for two years. He’s also banned from the futures industry for life, which means he can’t trade futures in any way that would require CFTC registration. (Paging all prime brokers!)Corzine has insisted the European debt trade that helped sink MF Global would’ve been profitable, if it hadn’t scared the pants off regulators, ratings agencies and counterparties.Now the politically connected former Senator and governor plans to trade on what policymakers might do. From the NYT:…Mr. Corzine… will seek to anticipate what often seems unpredictable: how the Trump administration and other world leaders will enact policy and, in turn,

An occasional series about the distant possibility that Donald Trump does not in fact herald the apocalypse:More punters are betting on a Trump impeachment, it seems.PredictIt is pricing a 26-per-cent chance Trump will get impeached this year, up from 16 per cent on Monday, and the highest since at least mid-February. And even if the probability was higher before then, the market is more important now: We’re more than 100 days into his presidency, and a few months closer to the contracts’ Dec. 31 expiration date.The market’s probability of a 2017 impeachment hit 24 per cent on Tuesday, on the highest trading volume in months (maybe ever) of nearly 61,000 contracts. That’s almost a third of the total number of contracts outstanding. Since the market doesn’t close, that included the initial

The much-feared foreign exodus from Treasuries is still not happening, as Citigroup reminds us after the latest Treasury International Capital (TIC) data release:On a valuation adjusted basis, we estimate that foreign purchases totaled $97 billion in March, compared to $57 billion in February. Now, Citigroup uses data on changes in foreign holdings of Treasury securities, rather than actual flows. (Different TIC datasets capture different things, and none of them are entirely clean — the monthly flows data excludes all transactions under $50m, for example.)The monthly holdings data introduces two challenges: Accounting for valuation changes, which Citi did, and knowing with any certainty the identity of foreign owners of securities.Even before accounting for valuation changes, Treasury

Want returns above 10 per cent? Easy! Just patrol sidewalks in wintertime to count the people who’re shivering standing outside bars while raising their risk of lung cancer.Municipal tobacco bonds have returned nearly 13 per cent so far this year, outperforming broader municipal and high-yield bond indexes. Granted, part of that was a rebound from a selloff after the presidential election — the market is more liquid than many other high-yield munis, which means they were easier to sell in the rout. Citigroup analyst Vikram Rai thinks they can earn returns in the “high teens” this year because of the securities’ high coupons.Given our Modern World of Internet Moral Outrage™, Rai clearly finds it frustrating that clients worry so much about the ethics of investing in tobacco bonds. He’s told

This post is a fictionalised thought experiment. YOU and YOU ALONE are in charge of what happens in this story. There are trade-offs, choices, and consequences. YOU must use all of your B.S.D. talents and much of your intelligence. Good luck. So…You’re the head of a trading desk, and you’ve felt a bit frustrated of late.Your desk trades government securities issued by the world’s largest economy. This is definitely not America we’re talking about, so we’ll call them, um…Tresories.Your main frustration is that you’re a primary dealer, which means you’re required to bid for a pro-rata share of each government auction. That can be a capital-intensive undertaking, and because regulations have made balance sheet space valuable in this alternate universe, you need to be careful about where you

Remember the bond vigilantes?You know, those all-powerful masters of the universe who can make presidents and monarchs beg for lower borrowing costs? (We’re assuming our readers are familiar with the James Carville quote.)Every so often there’s a story about their potential comeback, and the Trump Administration’s profligate spending! will bring the force of vigilante market justice! to bear on the US.We are not convinced. In fact, we had trouble finding any real bond vigilantes — at least, the kind who spend time policing inflationary policies rather than seizing Argentine ships or anything like that.So we had to ask a professional investor who plays a bond vigilante on the internet.Well, sort of. We called up Jim Leaviss of M&G Investments and its “Bond Vigilantes” blog, and asked if he expects real-life bond vigilantes to come after the US for fear of rising debt levels under President Trump’s proposed tax plan.Here’s what he had to say, edited a bit for clarity and with links embedded:Inflation is the thing that drives investor aversion to fixed income markets, rather than government borrowing.Historically, people used to talk about bond vigilantes in terms of deficits or significant increases in the debt-to-GDP ratio.

An occasional series about the distant possibility that Donald Trump does not in fact herald the apocalypse:While companies usually exceed Wall Street’s earnings estimates, it’s not common for them to beat forecasts this often.We’ve covered this sort of thing before, but here’s a quick refresher: More than half of S&P 500 companies normally beat quarterly forecasts, because analysts tend to start with pretty high estimates and cut them as earnings season grows closer. Then companies exceed those (lowered) forecasts when they report results.Still, corporate earnings beats look… kinda meaningful so far this quarter, according to Bank of America Merrill Lynch:So far, 68% have beaten on EPS, 63% have beaten on sales and 51% have beaten on both—well above average on all three metrics (where historically 53% beat on EPS, 56% beat on sales and 35% beat on both). If the beats continue at this pace, this would be the highest proportion of top and bottom line beats in 13 years…For the first time since 2012, analysts have been raising their full-year EPS forecasts since the start of 1Q earnings season—usually analysts have continued to cut estimates at this point.

Well, that flash sale passed quickly.First, President Trump said he was actively considering breaking up the big banks. Markets briefly freaked out, and the financial sector ETF took a dive. Then, it looks like the humans trading (or the smarter algorithms) remembered how well-represented Goldman Sachs is in the Trump Administration.So they bought the heck out of that dip:When the S&P 500’s trailing P/E ratio gets close to 25, you’ve gotta take your deals wherever — or however — you can get them.

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The Federal Reserve must have reasons it wants to shrink its balance sheet, but officials haven’t been terribly clear about them.In fact, I wrote in the latest Weekend FT about some of the compelling arguments against reducing the size of its holdings, citing prominent academics (including Ben Bernanke!) who said it might make sense to change the balance sheet’s composition instead of its size. But rather than addressing those arguments publicly, officials have mostly just assumed it’s necessary:As the Fed pushes ahead with plans to shrink its stock of about $2.5tn of Treasuries and $1.8tn of mortgage-backed securities to “normal”, it is puzzling that officials haven’t provided a compelling case for why the move is either necessary or desirable…In fairness, Fed officials have urged caution. Boston Fed President Eric Rosengren said on Wednesday that officials should move slowly to avoid jolting markets, and should consider purchasing more securities in a downturn.But Mr Rosengren’s argument assumes the desirability of shrinking the balance sheet in the first place — without articulating much of a reason. Neither have the rest of his colleagues.More explanation from the Fed is needed — and it seems more explanation from me might be helpful, too.

This seems like kind of a change right?Before the Trump Administration’s presentation of the one-page tax plan yesterday, many strategists were warning that wholesale reform wasn’t likely this year. And markets responded. But now, Citigroup analysts are reminding us that they “continue to expect Congress to pass tax reform (implying a moderately large fiscal stimulus) in late Q4/Q1.”And then there’s the macro team at Goldman Sachs, which just happens to be the former employer of Messrs Mnuchin and Cohn (we’re sure that has nothing to do with the optimistic take though):While we believe there is a good chance that tax legislation becomes law—in fact, market participants might be underrating the odds of tax cuts, a change from earlier this year—there may be few concrete legislative actions on tax legislation over the next couple of months for markets to react to.Anyway, many observers think the proposal is a pie-in-the-sky nothingburger that’s light on details, but there were a couple of significant points in the plan that are different from Trump’s campaign proposal.

The line between “tax haven” and “tourist money trap” isn’t always clear — and it’s getting even hazier in Delaware.Delaware is, in fact, a state — the second-smallest in the US, on a stretch of Mid-Atlantic coast between Pennsylvania, New Jersey and Maryland. Delaware’s official nickname of “The First State” is technically accurate but not really true in spirit, since it was first to ratify the Constitution but certainly not the first settled by Europeans.Its unofficial nicknames do a slightly better job capturing the state’s role, but they’re not really accurate: America’s Luxembourg/Cayman Islands/Guernsey/standard secretive tax-evasion centre. While companies do save on taxes by incorporating in Delaware — more on this later — they still have to pay federal taxes. That’s an obvious point, but one that clearly sets it apart from places like Luxembourg.Its “Incorporation Machine” moniker is both catchy and true, but it’s a little too narrow. Calling it a “Mid-Atlantic Tax Vortex” could be a better fit.The thing is, instead of helping non-residents dodge taxes, it often looks like Delaware just finds clever ways to pull their money into its own coffers. Its proposal for cannabis legalisation provides a particularly compelling example.

As the Forgotten Man‘s economic anxiety took over American headlines last year, the Metropolitan Man started worrying about his credit-card payments.The share of consumers who expect to default on loans this year has climbed by five percentage points since September, according to a survey from UBS.Who are these defaulters? Well, think less Fargo and more Silicon Valley:…17% of all consumers are likely to default on a loan payment over the next year (versus 18%/ 12% in Q4/ Q3 ’16). The profile of this group is middle and upper income, younger, male, urban, and concentrated in coastal regions. In terms of assets, they report higher home ownership than peers, but lower home equity values, greater usage of adjustable and interest only loans and higher non-mortgage related debt. In terms of incomes, a majority report that income barely or does not cover expenses and they are slightly or very worried about earning less money.That adds an extra dimension to investors’ concerns about rising car-loan defaults, and lends credibility to the idea it’s being driven by more than delayed tax returns. While the delay did probably lead to a decline in used-car prices, it only applied to low-income Americans, and these guys don’t sound like they’d qualify.

Academics are scared of making the Federal Reserve too political. But central-bank officials’ decisions affect the fundamental allocation of power in a country.One of the most important decisions they make is this: Who gets to create money?Depending on your political leanings, you might think there’s not much discretion to be used: Either banks create private money by lending/taking deposits and the government decides whether that money is legit, or the government creates money, and banks just add various forms of leverage. (Morgan Ricks of Vanderbilt addresses the public/private framework thoroughly in The Money Problem.)In the United States, the answer is both. Money is created in kind of a public-private partnership, as Ricks points out, since banks and states don’t issue their own notes anymore, but they do create money by lending. This is all fractional-reserve banking 101, of course.What’s most interesting is that the balance of power and responsibility in this US public-private partnership is still in flux. In fact, the future of the Fed’s balance sheet could help determine whether money creation becomes more public or more private from here on out.A (somewhat ironic) reason for this is the structure of post-crisis financial regulations.First, some background: US banks are the only private-sector firms that can keep reserves at the Fed.

Remember the mystery of the big Treasury auction bidder(s) that this correspondent covered in a past life?A big buyer (or buyers) that didn’t fit into normal categories started showing up at auctions last year, and bidding up two-year notes. Since that story was published, the buyer(s) have bought more than $25bn of two-year and three-year notes, with more than $15bn of that amount in two-year floating-rate securities.Going by this line from Zoltan Pozsar’s latest note, we might have a candidate:…money fund reform delivered just over $200 billion in net new demand for bills from government funds. Roughly one fifth of this demand was accommodated by the corporate treasury department of Microsoft Corp., which sold $40 billion of bills and replaced them with longer-dated notes.Well then!Regardless of how they did it, Microsoft has bought a lot of Treasuries maturing in two to five years. The chart below, from Pozsar, is a nice way to show real-world implications of US corporations’ growing cash stockpiles. Namely, that it could fill one-fifth of the demand from a major regulatory overhaul, just by lengthening the duration of its investment portfolio by a year or two.