YouSaid · the spoken record

Jeff Snider

lines on the record: 72
first: 2023-04-24
most recent: 2023-04-24
sittings or episodes: 1
sources: podcast

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“Central bank reserves. That's an alternative to do that. As you said, there's other forms of cash, including deposits with other banks, especially other dealers, which give you a little bit more flexibility in the things that you can do because the dealer will be able to multiply some of your things that you might want to do depending on what it is you want to do. And then, of course, there's the secured financing transactions, which gets you into derivatives and other types of opportunities there. And we have to, I mean, derivative transactions like a currency swap, even though it's a derivative, even though it doesn't really go on a balance sheet, it is every bit like a monetary or credit transaction too. So it depends on the balance sheet constraints and the balance sheet parameters at individual institutions. And they don't have to be banks either. It could be non-banks too. What is it they're trying to do at any given moment in time? And as you're going back to the chart that you showed, Jack, what we see is...”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“There's always, you know, banks have enormous, they have quite a lot of alternatives to manage both the asset side of their balance sheet as well as the liability side of the balance sheet. That's really what we're talking about here, secured financing transactions are a method of liability management. And it's an effective one. It's a very complicated one. Individual banks will make individual choices based on whatever liquidity parameters they're facing with. Sometimes that means you want to hold central bank reserves in the pre-crisis era where reserves were restricted and there weren't a lot of them, that meant that there was a robust market for reserves. Nowadays there really isn't because everybody has access to central banked reserves or some way to get them. But central bank reserves have a very limited narrow use. In a lot of cases it's just I don't want to do anything. I just want to do nothing. I'll just hold liquidity.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“As a bank, you want to own assets, there's securities, has the risks all the way from very short term treasuries, junk bonds, equities. Even treasuries wouldn't be worth that much because everyone wants to scramble for cash.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Collateral because it's multiplied can lead to a much larger consequence because the multiplier effect shrinks more than just a single issue or whatever it may be. And so you have this systemic scramble for collateral where just a little bit of revaluation some of that junk triggers this vast need to replace it with good quality collateral in these reuse and repledge chains”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“It's not like parties in the repo market have collateral. They post it and everything's one-to-one. You have this constant churn of reusing and repledging and occasionally rehypothecation, which I know people deny that happens, but we know it does. So there is essentially a collateral multiplier. How many times a piece of collateral might be reused means that a single U.S. Treasury bond might be supporting multiples of these secured financing trades? And it's not just repo. It's not just straight cash. You also have to keep in mind derivatives, which these days is probably more important and more likely to be the cause of the problem than the repo market is. So we have multiples of good quality collateral that it's getting reused. We've got multiples of bad quality collateral gets reused and just a small reevaluation and revaluation in the bad.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Terms, you're not going to get the most leverage that you can possibly get. So, what you end up doing is you take these junk bonds and you go to a money dealer and say, I would like to swap these junk bonds for U.S. treasuries. And the dealer will say, I don't have any U.S. treasuries, but I know somebody who does. It's usually an insurance company or a pension fund who has a portfolio of these risk-free assets, usually government bonds, that they're only too willing to lend out for a small spread. Essentially, you have your junk bonds, the dealer borrows U.S. treasury from a pension fund or insurance company. You all get together, and next thing you know, you're in the repo market with U.S. Treasury is that technically belong to you, but actually belong to somebody else. So we're already multiplying collateral. And then, of course, these transactions get even more and more complicated as we go. So the upshot here is that it's never as easy as you think it is. It's not straightforward as you think it is. It's not like.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Otherwise, you don't want to do the transaction because these are supposed to be as close to risk free as possible. So everything comes down to the liquidity characteristics. But the truth of the matter is we have this immense enormous global monetary system denominated in US dollars primarily, and there just isn't enough collateral to go around. For example, if you're a hedge fund, you want to invest in risky securities because you want to enhance your return. You want to leverage up those returns because trading U.S. treasures, you're not going to make enough money. You're not going to stay in business. So you invest in a bunch of low quality assets, some junk bonds, let's say, probably emerging market junk bonds. They have high levels of return. And in order for you to leverage that opportunity, you want to borrow these transactions in the repo market. But if you go in the repo market with these junk bonds, the repo market's not going to accept your collateral at the best.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“I mean, this is the hardest thing to get your mind around because it sounds like the government has expanded the amount of U.S. treasury. So there should be plenty of U.S. treasuries for everybody to use. But the fact is, number one, not all U.S. treasuries trade. We have the distinction between on-the-run and off the run. And off the run, that was a big problem in March 2020, as we saw. But either way, so we have a smaller subset that's actually liquid. Remember, this is the characteristic that repo counterparties prize prioritize above everything else. Because if you and I, Jack get involved in a repo transaction where you're pledging cash and I'm pledging collateral, some kind of collateral, all you care about is the liquidity characteristics of the collateral because if I default tomorrow, you have to sell the asset. And so you have to be absolutely 100% assured that tomorrow if I have to sell that asset, I'm going to be able to get all my money back.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Lateral Right. And how is it possible that there's a collateral shortage out there, Jeff, given the amount of US government debt that has been issued, given all this money floating around there, which there is a lot of money floating around it, how is there a collateral shortage?”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Collateral is fungible in a way that cash never is. I mean, you could think about the easiest way to think about it is if you're a money dealer, you want to have as many spare, you want to have the best quality collateral in your inventory because you'll be able to lend it out and relend it, those in the marketplace who are desperate to get their hands on it. Because if you're using lower quality collateral and that's being rejected, you only got you're getting fewer and fewer options. So the value of the higher quality collateral has to go up because it's in such high demand when there's less and less collateral that's available or acceptable on the best kind of terms during these sorts of periods. That's why we associate these low bill yields, high bill prices with these periods like 2008 or 2020 associated with massive monetary dysfunction because in one”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“And you talk about a collateral. So Treasury bill, you can buy it for $97, depending on the term, wherever that can be pledged as collateral for a loan. But what about parking something in reverse repo facility or basically having cash? Why are the other things not collateral?”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“On the asset side of your balance sheet, in order to have that collateral available in case you need it. So again, it's not an investment consideration. You have to look at these things as sort of balance sheet tools. And at times of strain like this, the value of those tools just goes through the roof. And because of that, you're willing to pay an extraordinary premium because you have to have these tools. Otherwise, you risk not being able to stay in business.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“It's even more extreme than that, Jack, before we get to the reason. I mean, you look at the Treasury Bill auctions that have been conducted since mid-March and the four-week bill auction for the last six have produced zero percent low yield. In other words, at least 5% of those auctions, 5% of those who are bidding at the auction were awarded the bid said, I will pay the highest price I can possibly pay just so that I get my hands on these treasure bids. I will accept zero return, literally zero nominally zero return. So I have these treasury bills. And the reason is because it's not about investments. It's not about choosing a variety of investments for, you know, do I want to put it in GC repo? Do I want to put it into the reverse repo? It's about specifically making sure that you get your hands on that Treasury bill instrument. You have to have that instrument in your portfolio.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Right. And let's just explore the possibilities of liquidity preference, treasury bills are preferable. What are the risks of, let's say, a repo entering into repo transactions, sofa, something like that that you get 4.9% on or the Fed funds rate or the interest on excess reserves for banks, the reverse repo facility, which money market funds now have access to as well as treasury bills? What's so wrong about getting close to five percent, what are the fears there?”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, just the rest of the charts. I mean, look at where the dots are lowest. Are they tending to be lower? We correlate those with periods of general money market stress. I mean, look 2020, you got that one there. Some stuff in 2018 and 2019. We saw lots of strain then. And then, of course, the big one, as I mentioned earlier, and it's right there in your chart, we're seeing stuff in the money markets that we haven't seen really since 2008. The stuff with everything that we see with Treasury bills now, the heightened demand for them as collateral, same thing happened, especially in early 2008 around Bear Stearns. And not just before Bear Stearns, but also after because the Bear Stearns failure actually triggered a whole bunch of aftershocks and after effects, including this generalized scramble for collateral where market participants wanted to make sure that they had their hands on the best stuff because they didn't want to be the next Bear Stearns.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Right. And let's put this chart up right now. This is the spread between the one month Treasury bill yield, which is now very low, minus the Fed funds rate. And the Fed funds rate, you know, when the Federal Reserve talks about what the rate they changed, that is sort of the target rate they change. And it is now deeply negative that large red dot you can see trading about 170 basis points at the peak yesterday. And it really hasn't reached this level since. Summer of 2008, and you can see those tiny little red dots there. This is pretty special territory”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Tier of financial collateral that's used throughout the money marketplace, it is the best of the best collateral. And what you see oftentimes in periods of strain in these collateral streams in the collateral system is that participants in it get herded as lower quality forms of collateral get rejected and revalued and all sorts of bad things. It leads to collateral calls, at least some of these chains and collateral chains imploding, which means that essentially everybody gets herded into a narrower and narrower and narrower subset of the marketplace. And since treasury bills are the top part of it, you have this tremendous rush of demand for the best quality collateral because there's other things going on besides what we can see in the T-bill rate.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“It can't be about the investment characteristics, right? Because you're right, Jack. You go through that menu of alternatives. Any rational human would say, why would I want to own something that only returns about 3% or 3.2% or something like that? When I can get almost exactly the same, in fact, even better in some characteristics, just by rolling over in repo. If I've got spare cash, I could just roll over GC repo. Collateralized by a U.S. treasury, zero risk, and get closer to 4.8%. Why on earth would I ever accept even a couple basis points less than that, let alone something like 150 or 170, as you said? Obviously, there has to be some form of value, some kind of value in the specific instrument that has nothing to do with the interest rate characteristic. And of course, the answer to that question or that puzzle is it's Treasury bills, especially the short-term bills, are the highest.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Compare it to the three month Treasury yield, which is now yielding over 5%, or something like the federal funds rate, which is in high four percent, a little bit less than 5%. You can get just by parking your money at the Fed for the reverse repo or IOER for Fed funds market that's between other banks. But these are supposedly you'll risk free markets, but then you have a one-month treasury bill trading over 100 basis points. I think close to at the low in rates yesterday, 169 basis points below a comparable short-term swap or sofa Fed funds repo, all sorts of alternatives. Why is the market putting such a premium on treasuries? What is so special about them and what does it indicate to you?”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Secondary market squeeze, and the bills triggered then an even bigger one at the auction, and it just, by one point, I think the four-week treasure bill was under $3.15%. So down roughly 60, 70 basis points on the day, which again, I mean, a couple basis points is eye-opening. So what is 60 or 70? 60 or 70 is, like I said, it's something that's become more common since the middle of March. And it's something that we saw around 2008 too. The big drop in bill yields, which indicates there's massive amounts of intraday demand. And demand is...”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“Is usually what everything is all settled out and fine, ready to go. We've been seeing these absolute epic collateral runs, especially in the four-week Treasury Bill, where the yield just falls off a cliff. And so yesterday we got two of those. Like I said, we had one after the three-month bill, the regular pattern early in the morning. And then in the early morning of the U.S. regular session, we had about a 20 basis point drop in the four-week treasury bill yield, which already, I mean, a couple basis points is enough to get your attention because bills are not supposed to trade all that much. I mean, there's not supposed to be a whole lot of volatility in these instruments. So a couple basis points you're thinking, okay, something's going on here. 20 is like 2008 territory. And then not only did we get a 20 basis point drop and the bill yields early in the morning, then the auctions came in before we can eight-week bill auctions. Just massive amounts of demand. So it looked like the earlier more.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT
“It's not just strange, Jack, as you know, it's insane right now. The last couple days have been just completely crazy. But it's not just the last couple days. We're sort of continuing on from what happened really from the middle of March forward as SVB and signature and then credit suise sort of unleashed a tidal wave of shrinking of collateral chains and other types of things which have just surge in demand for the best quality financial collateral, which happens to be the shortest term Treasury bills. And what we saw yesterday was just an epic, epic buying squeeze. Actually, there was, I think, two of them, one that began early in the morning, hit the three-month treasury bill. Usual scramble for collateral. You see the bill yields drop in the early morning hours. But then what has become a consistent pattern since mid-March, and I don't really have an explanation for this because this is something brand new during the U.S. regular session.”
2023-04-24 · Forward Guidance · Jeff Snider: The Credit Crunch Is Here As Ultra Rare Bond Market Signal Flashes Red For First Time Since 2008 · IDENTIFIED FROM THE TRANSCRIPT