YouSaid · the spoken record

Mark Cabana

lines on the record: 63
first: 2023-07-24
most recent: 2023-07-24
sittings or episodes: 1
sources: podcast

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“For Yeah, well, if you're a client, it really helps, in particular if you work for a company that does business with Bank of America or if you work for an institutional investor that does business with Bank of America, that's the best way to ensure that you can get our research. And if you'd like to be signed up, feel free to reach out to me, and we'll be happy to make that happen, assuming that you meet those key criteria.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“The market froze because of that. And the market making formulation process was unable to work because there were all sellers and no buyers. The SEC rules, in our view, don't adequately address that risk, and we could still see that some of the market dynamics that occurred in 2020 happen again in the future in another dash for cash scenario. Yes, you've reduced the first mover advantage. You've also allowed a provision that prevents dilution of existing shareholders. And those are laudable goals, but they don't get to the underlying issue that drove some of the short-term money market stress in March of 2020. It's probably beyond the scope for the SEC to do that, but nonetheless, we don't think that these rules go far enough to ensure that That type of market event never happens again.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Get my money out quickly because if you get your money out too quickly, you might trip that fee or you might trip that threshold and then be subject to that liquidity fee or tax in order to get your money back. So we do think that the imposition of the fee will discourage certain users to stay in the Prime Minister Mutual Fund product and it will certainly help reduce that first mover advantage. It'll probably help cheapen up front-end credit as you see those outflows, but that is really a story for the second half of 2024, which is when we think that this role will ultimately be implemented. But we do think that the ruling doesn't fully”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Down. That is a thenema to many users of money market mutual funds because they value these vehicles for their liquidity attributes and a gate runs really counter to that. So it did away with a gate, which was encouraging. imposed a liquidity fee, meaning that if you want to take your money out and if a bunch of other investors want to take their money out on a certain day and you cross a threshold where there's 5% of total fund assets or more, then you are subject to a fee for getting your funds out. It's almost like a tax to withdraw your money. And the SEC did this to try and reduce what it saw as a first mover advantage in periods of market stress where somebody would say, hey, this market doesn't feel right. I'm going to.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, sure. Okay. Well, look, your listener must really love the weeds if they've lasted this long into money fund reform. But as somebody who thinks a lot about funding markets, this type of stuff is important. And I'm greatly appreciative of any listeners that have stuck with us to this point. So last week, the SEC did come out with a finalization of some of their money market rules. And these rules did a number of things, but if I can just really highlight the two most important, number one, they did away with the possibility that a gate could potentially be imposed upon an investor at any point in time. And a gate is if you put your money into a mutual fund and then you want to take it out, the mutual fund then has the ability to say, nope, you can't get your money. I'm putting a gate.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Correct. That's right. And look, I mean, the Fed has been quite clear, we think, about their intention to keep rates higher for longer, to not necessarily acquiesce to what the market expects in terms of cuts. And again, there is the risk that the Fed might overdo it. And at some point, you get that type of bull flattener, that sort of last gasp move on the curve before the Fed ultimately relents. But we just think that being along the back end, again, it guards against both of those curve scenarios that I just discussed, and it works in an environment where you do have so much that's priced for steepening in the forwards and so little that's priced in duration terms. So again, we just think the duration play is cleaner and easier at the end of the cycle as opposed to the curve trade.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“In the market for whatever reason. The Fed is still holding on to a desire to want to keep policy tight. And that risk-off allows the back end to rally by more than the front end. you could see either one of those scenarios play out, we think that the duration play is clearer than the curve trade. We also think if you look at where the curve is priced and where rates are priced in the forwards. So what the market is expecting, and remember if you want to win when you invest, you got to beat the forwards. We just think that there's so much steepening price. So there's a much higher bar for the steepener to work. There's a much lower bar for an outright duration view to work. And that's why we've been recommending that clients. We would recommend clients express their end of cycle trades more so in duration as opposed to the curve.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so we think that the 10 year is just a cleaner and easier expression as an end-of-cycle trade than anything on the curve. Because when you get towards the end of a cycle, you can have a couple of different dynamics at play. You can have a dynamic where, okay, we all see the data turn at the same time and it's clear that the Fed needs to stop tightening and start easing. And then you get the classic bowl steepener where rates go down, but front end rates go down by more than long end rates. But another dynamic that you can see at the end of a cycle is a bull flattener, which occurs when the market sees something that it doesn't like in the economy, or there's some type of risk off.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“And one of the things that gives Qt its ability to run for so long is the fact that we've seen the Fed's overnight reverse repo facility drop so sharply and drops so quickly. Now we long thought that you would see RRP drop quickly once you got the money market supply and once money funds wanted to extend out the curve. And the pace of RRP reduction is about what our forecasts had predicted. And so QT can certainly run for longer as long as we see that continued reduction in money fund RRP utilization, which we do expect if you can avoid that bad recession or if you can avoid that bad market functioning issue.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Not contradictory in their view. If one of those scenarios occurs, we think that the Fed won't hit this concept of reserve scarcity until very deep into 2025 or maybe early 2026. And in the numbers that we run, very consistent with the Fed and their own modeling that they publish, or at least the New York Fed publishes on their balance sheet, the balance sheet reduction doesn't stop until really the second half of 2025, probably.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“There's some type of real market functioning issue or market functioning breakdown. And then the third state would be if the Fed can get back to what they call reserve scarcity, where they've drained enough excess liquidity out of the banking system that banks are now having to compete very aggressively for funding and that there's just an inadequacy of reserves or cash in the overall banking system. We think that that first condition is the most likely. And that's why given the B of A House view for a mild recession, Fed rate cuts in May of next year, we in our base case have QT stopping in May. But it's certainly possible that we don't encounter that recession or it's possible that the Fed just says, hey, even though we're cutting to offset a mild recession, we want to keep QT running.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, quantitative easing was somewhat born out of necessity and was borne out of a desire to support market functioning and ease overall financial conditions in the face of serious challenge to the economy. Back in 2008, it was due to banking system concerns. And in 2020, obviously, it was due to a pandemic. For QT, we have long argued that QT will stop under one of three circumstances. Number one, you get an economic slowdown or a recession and rate cuts that are designed to stimulate the economy. In that state of the world, the Fed may not want to be easing on one hand by cutting rates and tightening on the other by doing QT. So that's one state. Second state would be”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Of that, and you'll probably also see slightly higher real rates as a result of that. And so the Fed tells us that they think neutral is 2.5%. That's 2% inflation and 50 basis points of real rates. I'm kind of comfortable adding 25 basis points onto each one of those, assuming that neutral could be closer to three. And then we believe that there will be some type of term premium, treasury cheapening in relation to the expected Fed path, as we were just discussing. We assume that that's 25 basis points. And that's why our 10-year forecasts in the long run are at 3.5% as opposed to the Fed's neutral estimate that's two and a half or our economists that are sort of between two and a half and three percent.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so, well, we start by asking ourselves, where do our economists think neutral is? Where does the Fed think neutral is? Where does the market think neutral is? And look, the way we've been anticipated or the way that we've been thinking about this is that we assume that the Fed will probably average 2% inflation over time. But the risks are skewed slightly higher than that, just given how sticky inflation has been and given some of the broader and more structural changes in the economy, think the war in Ukraine, think onshoring, think more domestic investment in things like chips for resiliency purposes. So we think that you'll see slightly higher inflation as a result.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“That makes sense. How do you think on a longer term about where is kind of the home base for the 10 year? A year ago, we never would have thought it was at 4%. In 2005, we never thought that we'd see negative rates in Europe. It's very, very hard to guess. And I mean, how do you sort of think about it?”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yes, that's exactly right. Modal is when you run a scenario, it's the most frequent single occurrence. And when you are an economist or a rate strategist, you have to think about, well, what is the modal path? What's the most likely path that we are going to see? The market prices in average path, so it's pricing in a much wider set of distributions. And that's why even though an economist might think, well, they're only going to cut 25, the market could price something much more aggressive than that because it's pricing in, yes, some probability of a 25 basis point rate cut, but also some probability of a hundred basis point rate cut. But that's kind of the market. That's how the market operates. And that's a key difference between how an economist might operate or how a market participant assessing that range of outcomes would operate.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Does that result in, I think you said, bimodal, meaning that the cuts that you'd see priced into the market, they're not necessarily pricing in a 100% chance of two cuts. They're pricing in 80% chance of no cuts and 20% chance of a lot of cuts.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“No, no, let's hope we never see another March 2020 scenario in any of our lifetimes. Yeah, so the pace of cuts that we envision will look much more similar to, let's say, the summer and early fall of 2019, where it'll be 25 basis points, a meeting, and that'll continue until the Fed gets back down to neutral, which they believe is two and a half percent. The market thinks that neutral will be maybe a little bit above 3% in nominal terms, but somewhere in that zone. Now, of course, that makes sense from a modal forecast perspective. The most likely outcome. But there's a whole host of risks around this distribution. And I think our economists would certainly tell you that if the economy Slows faster than they anticipate that there's a very real risk that the Fed will end up cutting faster as well.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Kind of envision this will look somewhat like 2019 when the Federal Reserve was cutting during a growth slowdown that you're not allowed how bad the economy was then but it was somewhat of a gross slowdown and unlike obviously March 2020 which is emergency cuts which I presume is not on your base case”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Maximum employment and start cutting rates in May of next year. So think around the middle of next year. Obviously, if the growth slowdown is sharper and faster, then they'll be cutting earlier. If the growth slowdown is milder and doesn't happen for longer, it'll be later. But that is our house view. And it's a little bit later than what the market is pricing. And again, we do think that some of what the market is anticipating for the Fed is a little bit too many cuts too soon. And so we've been recommending.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“So when will we see clearer signs of that? We think around the turn of the year. And you're already starting to see some signs that inflation is moderating, that some of the key components of CPI are shifting lower. Used cars is a big driver in the last report. Shelter prices appear to be slowing. Services, X housing, quote-unquote supercore measure of inflation was also flat. So it was flat on a month over month basis, didn't go up at all. So you're seeing signs of improvement there that we expect will persist in time. And if that's right, mild slowdown, coupled with inflation falling, we think that the Fed will judge that it is on a path to achieve its dual mandate of stable prices.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“So, you're going to have a mild economic slowdown. You're going to see the pace of hiring decelerates. We've already seen it moderate. The labor market is still very strong and very resilient by all accounts, but it has been moderating. And as that occurs, they have more confidence that you'll see inflation continue to shift lower over time. But this is going to be more of the, let's say, garden variety recessions as opposed to a big gnarly pandemic-induced recession or financial crisis induced recession like the last to have been. This is going to be not nearly as significant we expect.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Correct. Yeah. So the B of A House view, which is owned by our economists, does anticipate that the U.S. economy will be in a relatively mild recession in the early part of next year. Now, when you ask them, they tell you, well, it could be a mild recession, maybe with 51% probability or a growth recession with a 49% probability. But look, a recession is two consecutive quarters of negative real GDP growth, or at least that's been the typical definition. A growth recession is where you just have positive but below trend growth. So they are somewhat on the fence as to exactly what type of slowdown this will be, but the overarching message from them is that it's going to be a mild one.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“The two are not inherently contradictory, although I can certainly understand the question as to if you're worried about supply demand, how can you have interest rates going lower in your forecast? And the answer is we have interest rates going lower in our forecast because we think that the expected path of the Fed will be shifting lower as the economy moderates.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“It's not inconceivable that at the same time you could have a supply demand imbalance and that that spread to the federal funds rate path could be widening and could be cheapening. So when we do our rate forecasts, the single most important driver is the path of the Fed. We do think that the economy will show greater signs of moderation, slower employment growth, more signs of disinflation. That will convince the market the Fed will be cutting at some point, likely in 2024. That will help push longer-term interest rates lower. But we can also envision a scenario where even as that occurs, you've got this supply-demand imbalance brewing at the back end. And you're seeing treasuries as a spread to Fed funds in that expected rate path widen out.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, we think about at least the way I think about the treasury market is really driven by two different factors. First is the expected federal funds rate path. What's the Fed going to do? The OIS path, as I think about Fed funds OIS. And that is, by and large, the single most important driver of interest rates and where interest rates will go. The second factor to then think about is well, where are treasuries trading as a spread to the expected OIS path? Now, the economy can slow down, the Fed can be cutting rates, and the OIS path can be declining, and that will move rates lower.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Widely available are some of these repo balances that they will be relying on. What is the cost of leverage? Because we know that with additional bank regulations, which are coming down the pike, you would think that dealer balance sheet costs will be rising. And as a result, there is a risk that treasuries will need to be cheapening, at least cheapening in relation to sofa swaps or cheapening in relation to Fed funds OIS swaps. So that's certainly a risk that we see to the outlook. And it's fundamentally rooted in a potential building supply demand imbalance at the back end of the treasury curve. So that is certainly a risk that we think about when we look at the rates market and we think about how the process of all of this supply and ongoing Fed QT will play itself out.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Ends up hiking more because inflation is increasing and their long positions are somehow underwater. So we just don't know that we can count on the asset management community for a strong source of coupon demand, demand out the curve, unless we realize this type of economic slowdown and potential de-risking. So then there's really only one other obvious source of demand that's left, and that's the levered hedge fund community. And the levered hedge fund community will buy treasuries, but they need additional repo. They need additional leverage. And the more leverage demand that they have, the higher the financing costs rise, and then the greater the spreads that these RV hedge funds will need to receive in order to justify that trade. And we do have questions as to how deep is the demand from the Leveard Hedge Fund community.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“One is the asset management community. And the second is the levered hedge fund community. Now asset managers think you're broad and large investment firms. They think that 10's around 4% are reasonably attractive, but the asset management community, according to surveys that we do with our clients, including the asset management community, indicate to us that they're already quite long. They have been buying and they are probably a little bit over their benchmarks in terms of what they want to continue to buy. So that source of demand will really require some type of economic slowdown or de-risking to continue with large-scale inflows into the asset management community. Or heaven forbid the”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Official sector for an official or foreign private, they're not buying that many treasuries because they're FX hedging costs are so high that if they want to buy a 10-year treasury, let's say, and hedge out the FX rate exposure, when you run the math on that, it becomes very, very expensive for them. A lot of that has to do with the very inverted yield curve. So foreigner demand is not particularly strong. We then think of the pension and insurance community, and they'll buy, but they're buying is not terribly market sensitive, primarily because these entities are mostly engaged in liability-driven investment strategies, and they got a plan for how they're going to invest. And it's not like if Tens are at 4%, they're buying a lot or if they're at 3%, they're not buying very much. So they're just not that sensitive. So that really leaves just two other sources of demand.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“At the August refunding, which is in just about two weeks from now, and that's going to increase the total amount of supply of long-term bonds. We have a greater questions about where the demand will come from for that type of paper because it's not as obvious as pointing to the RP. And many of the traditional demand sources are just not that active right now. For us, we typically think of five demand sources, excluding the Fed, and we know the Fed's doing QT right now, so they're a net seller technically. Those five sources of demand include banks. Banks aren't buying because they're able to make loans and cost of funds are relatively high. And if they've got any excess borrowing, they want to pay it down. So banks aren't buying a lot of securities right now. Two, the foreigners”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“For the remainder of this calendar year, specifically, we think there's probably another 800 billion or so of additional treasury supply that we'll be coming. That is going to be met with very strong demand and ongoing demand as funds leave the Feds overnight RRP facility. For short-term issuance out of the Treasury, we're not too worried because we've got a lot of confidence as to who's going to buy it. And we've now seen the type of levels that will be required to clear there. We do have greater questions and see greater risks around who's going to buy the long-term treasury supply between the months of June and December. There's going to be another $650 billion of additional coupon supply hitting the market. Treasury is going to increase the size of some of their coupon auctions we expect.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“That we have seen post debt limit that's put upward pressure on money market rates, it's allowed bill rates to trade slightly cheap to the expected path of the Fed's overnight RRP facility. And right now I would guess that if you were to ask a money fund where a one-month bills trade in relation to the expected overnight RRP path, they would tell you that it trades at about two to four basis points cheap. If you were to ask them where three-month bills trade in relation to the expected overnight RRP path, they probably tell you that they trade around five to eight basis points cheap. And these are the levels that are seen as sufficiently attractive for money funds to leave the RRP and extend out the curve. Those are the rate levels that are required to pull the money out. And again, we think the Treasury will continue to provide a pretty healthy dose of bill supply.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Out the curve. And this made a lot of sense when for the better part of 2022 and early 2033, there was an acute supply-demand imbalance at the front end of the curve, where there was so much demand at the front end and insufficient supply such that Treasury bill rates traded about on average 25 or 30 basis points rich to the expected path of the federal funds rate or the expected path of the overnight RRP. So if you were a money fund, you had to ask yourself, why would I extend out the curve and lock in these relatively low yields when I can get a better deal by staying very short? And that's what they were doing. They were staying short. You know, it's kind of like that curvin version that we were talking about earlier when the curve is inverted. You're biased to keep your money in a little bit shorter tenor. And now with all of the supply.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so we have less concerns about who's going to buy at the front end. We'll talk about that and more concerns about who's going to buy at the back end. But in terms of who's going to buy at the front end, there's still 1.7 trillion dollars or so that's sitting in the Fed's RP facility. By the way, if that sounds like a big number, it's because it is. It's a very large number. Remember the average annual US deficit is somewhere around 1.25 to 1.5 trillion. So there's almost one annual deficit's worth of money sitting in the Fed RP right now. So there's a lot of pent-up demand still there. Now, the money funds, you're absolutely right, Jack. They are sitting in RP because they feel that it is the safest alternative that they have or that they don't have adequate or compelling opportunities to extend.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“So, the reverse repo facility, it's a fixed rate by the Fed, and the Fed changes it unlike treasury rates, which are market rates, which move based on buying and selling. So because there was so much treasury bill issuance, their price went down because the supply went up. So their yields, you could get a higher yield over the reverse repo facility. What did that spread look like that made it somewhat attractive for money market funds to leave the reverse repo facility and buy treasuries? And also, tell us your thoughts about that spread going forward because I know you have some concerns about who's just going to buy these treasuries and bonds going forward.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“And pent up demand was residing in the Fed's overnight RRP facility. And the Treasury believed for good reason, as we also did, that there would be very strong demand for the paper that they would bring to market. And as long as money funds could generate some type of modest pickup in relation to the expected path of the overnight RRP facility that they would willingly extend out the curve. And that's what they've done. There was some talk that the Fed would have to push the money out because it was so sticky and it would never leave. We long disagreed with that view. We just thought that you needed more supply trading at slightly cheaper rates in order to pull the money out. And that's exactly what has happened. So the process has been very natural. It's been very organic. And it's really been money funds were choosing to extend out the curve with adequate supply at the right.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“We thought the Treasury actually did a very good job of signaling their issuance intentions. We had long expected that once the debt limit was passed, that with the depleted cash balance treasure would go out and issue more short dated paper in order to rebuild its cash balance. We thought the Treasury would do that simply because, number one, bills have long acted as Treasury's financing shock absorber. So anytime they encounter some type of unexpected financing need, they've tended to rely on bills to absorb that financing shock. Clearly the debt limit is seen as a financing shock, so it would make sense that they would rely a little bit more on bills. But we also think the Treasury did that because they know very well that there was a lot of sidelined and pent-up demand to purchase short-dated securities. And all of that...”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Through the financial system pipes emanating from some of the bank stress that we had and then the debt limit. But it does appear, at least for the moment, we are in a bit of a more stable equilibrium. And there aren't such sharp movements in where the money resides within the system, at least not happening right now in relation to the sharp movements that we saw over the last couple of months.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Was running on fumes, just like if you stopped your ability to receive income or any inflows into your bank account, which essentially happened for the Treasury, then you would run on fumes and you would deplete your existing bank account. Well, as soon as the debt limit was resolved, Treasury wanted to rebuild that bank account and they wanted to rebuild it quite quickly, understandably, because they were running on fumes. And so they ended up issuing, gosh, I guess now over $600 billion of bills since the debt limit was resolved. That money market supply has cheapened money market rate levels such that money funds feel like they can extend out the front end of the yield curve. They can buy some of this cheap money market supply and they can reduce the amount of cash that they've been parking with the Fed at their overnight RRP facility. So lots of plumbing here, I know, but there's actually been a lot of movements.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so we have recently seen that the Fed's overnight reverse repo facility has dropped, gosh, almost five hundred billion or so just in the last almost five or six weeks. And the catalyst for that facility to really drop didn't have anything to do with banking system stress, but it had almost everything to do with the debt limit. Remember how six weeks or so ago we were all worried about the possibility of a technical government default and whether or not the government would be able to pay its bills. Well, government figured out how to do that Congress help figure out how to do that. And then once the debt limit was resolved, Treasury ended up issuing a bunch of bills or short dated Treasury securities. And they did that because through the debt limit process, they had depleted their cash balance. The cash on hand that they held got to be very low. Essentially, the government.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“And so that situation has improved. The reverse repo facility has been drained. And I think the composition of aggregate money market fund holdings has moved as a percentage from being dominated by the reverse repo to the treasuries that you're talking about and agency securities. What has been a catalyst for that?”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“It's just changed in terms of the form of borrowing that the bank was using, the liability that the bank had changed from a deposit to a borrowing from the federal home loan system. And as long as the money was staying within the system, we felt that banks would likely be able to find a way to get adequate liquidity and financing. And again, what we were most worried about was that the money could potentially leave the banking system, not be available, and that money funds will just say, look, everything looks too scary to us. So I only want to keep my money with the Fed and I want to completely move it out of the banking system.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Then it leaves the banking system. And that's what we were watching to see if there was a flight to quality out of certain types of deposits into money funds and then out of the banking system. And we did not see that, which was very encouraging. We saw that the money was staying within the banking system. It was just getting moved around and it was going through different channels to then find its way back into a potential bank deposit. Like let's say you thought you were in a troubled bank. We'll call that bank name bank A. So you took your money out of bank A, you moved into a money market mutual fund. If that money fund then took your money and lent it to the federal home loan banks, which is a government sponsored enterprise, and then the home loan lent that money back to bank A. Bank A still has the deposit that left.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“So a bank deposit leaving banking system going to the money market fund, if that money market fund 100% buys a treasury, then that money stays in the banking system. And if it buys a federal home loan note or discount bond, that stays in the system. But the issue is if it goes into the Fed's reverse repo facility, what happens then?”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“It's coming out of a bank and then going into the home loan system and that being used to provide advances. So we're not seeing signs that the cash that's moved into money funds is necessarily leaving in like a flight quality away from the banks. It's just being recycled through a different vehicle or potentially through another vehicle that the banks can then obtain access to if they're willing to pay up in order to get those funds, i.e. think home loan advanced.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Well, we've seen that at least the very sharp pace of inflows into money funds right after SVB has moderated. There continue to be inflows into money market mutual funds, which is understandable if you've got almost zero yielding deposits and you can earn over 5% in a money fund. It's not a very complicated trade, assuming that you're comfortable with the liquidity difference between the two instruments and that you're willing to sign up for that money fund. So what we have seen is that the pace of money fund inflows has moderated, which we do think is encouraging. We also see signs that even though the money comes into a money market mutual fund, it's getting recycled within the banking system. So a money fund is either buying a treasury that's then being used to have the treasury department provide that to another depositor and stay in the financial system.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Thanks. You talked about federal home loan bank term funding program, Fed things. The third thing you mentioned was the money market fund. I know there has been quite a migration from bank deposits into money market funds. But when you made that comment, would you say that actually you're seeing some good news on that front?”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“And given the inverted shape of the yield curve one year OIS was quite substantially below current market rates. So it was a very attractive financing option for the banks, not only because of the low market rate, but because of the full par value that was able to be financed with the Fed.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, I mean, so they were able to fund these, the bank term funding program had two key tenets in terms of the amount of funding and the cost of funds that were available to banks. Number one, banks were able to fund securities at par. So if a security was trading at 95 instead of the $100 par, the Fed would say, well, look, I know that the security, it's high quality, it's a treasury, let's say, and you can fund it with me at 100. And even though it's only trading at 95, I'll still give you $100 for it because I know it is money good. The second thing that the Fed did to increase the attractiveness of the BTFP was to offer below market rates, essentially. The Fed allowed the banks to borrow at one-year Fed funds OIS plus 10 basis points.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT