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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“Bank term funding program. And the bank term funding program we did think was a very valuable tool because it allowed banks to turn their very high quality assets that they held into cash at relatively attractive terms with the Fed. And this prevented the need for banks to fire sell some of those assets in the open market and not only thus put upward pressure on existing treasury or mortgage rate levels, but realize potentially deep losses on some of the securities that those institutions held. So we did think that the bank term funding program was a very effective tool for the Fed to deploy and mitigate some of the risks about insufficient bank ability to generate liquidity and for banks to sustain potential. Potentially quite substantial losses on any forced sales of securities.”
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 that the official sector had to act, and they had to act because we were worried about signs of contagion in the market. If this bank goes down, how might that impact another bank? And if deposits can leave quickly from Bank A, why can't they leave quickly from bank B? So we did think that there would be some type of official sector response to try and stop that contagion, to try and stop the bank run fear. Because as you know, the destabilizing thing about bank runs is that they can be irrational. They can move quickly. And banks can find that if their name is in the crosshairs, then there can be a very large outflow of deposits from that institution, what they thought were stable deposits can quickly turn into flighty deposits. So the official sector acted to guarantee depositors, and they acted by rolling out”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“A new facility called the bank term funding program that made a lot of loans. But that activity has really slowed down. And if anything, it may have peaked to some extent, at least the Fed's BTFP program may have peaked. That's encouraging. And the third thing that we watched was money market mutual fund inflows, and those have continued, but not at such a rapid pace that we saw in the immediate aftermath of those bank failures. So on net, there are encouraging signs from the funding market as it relates to bank stability. And if they hold, then I think that the Fed will at least have more confidence that the banking system is indeed resilient and sound. And that shouldn't be a material consideration for them in the setting of monetary policy and their fight to get inflation down.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Pre SVB failure to the end of May, the federal home loan bank system increased their debt outstanding by about $300 billion. This is roughly a 20% increase in the total amount of debt outstanding that they had. But since the end of May through today, the vast majority, over 80% of that has been paid down. Something like last time I checked, $250 billion out of that $300 billion had been paid down. So that's a clear indication to us that some of the home loan borrowing, some of the home loan advances and debt that was associated with that was likely done for precautionary purposes. And that is indeed an encouraging indicator about the resilience of the banking system at the moment. The other things that we look at, as I mentioned, Fed emergency lending. The Fed made a lot of discount window loans.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, that's right. So when we were assessing banking system stress, we really looked at three key things, at least from a funding market perspective. Number one, federal home loan bank activity. Number two, emergency Fed lending activity. And number three, money market fund inflows. Now, on the first thing that we monitor, the Federal Home Loan Bank activity, remember, the Federal Home Loan Bank system is essentially, well, they frequently call themselves or academic researchers called themselves the lender of second to last resort, the Fed being the lender of last resort. But they have that description because”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“So people think a lot about the Fed as a big lender to banks, but actually it's the federal home loan bank that is doing a lot of the lending. And I think the numbers are something like 300 billion of new bond issuance from the federal home loan bank in order to fund advances to banks, which are loans to banks. And then you said something like 200, 250 billion has been paid back roughly.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“To get deposits in the brokered CD market, let's say, or paying up to get funding from the federal home loan banks and the federal home loan banking system. And what we've seen today is that some of the precautionary funding that was taken out in the spring has been paid down to some extent. And that's a generally reassuring sign for investors. So I do think that time as well as banks' ability to adapt to this different funding environment have both contributed in the reduction of concern about financial sector stability, at least at the moment.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“That was the real concern about financial stability at the time of the survey that you just cited. Today, we are in a better place, and we're in a better place because it seems like, well, we've had more time to assess how other banks have behaved. We went through Q1 earnings. We're just in the early stages of Q2 earnings right now. So we're getting a better look at banks and how they've been able to adapt to not only a higher rate environment, but an inverted curve environment. And we have also seen how banks have tried to adjust to just the higher overall funding rate environment that they face today. Right after the failures of the banks in spring, you saw many banks pay up to acquire relatively high cost stable sources of financing that could be through paying up.”
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, the biggest difference is between the spring and, let's say, the summer are that in the spring we did see great concern about banking system stability, resilience, safety, and soundness. And these concerns were triggered by the failure of a couple of relatively good-sized banks. Obviously, there was Silicon Valley Bank, signature bank, and then First Republic, all who failed within either one weekend or a couple of months from each other. And this was a surprise to many. It was seen as monetary policy and the inverted yield curve finally starting to bite in terms of the, at least a banking system. And there were questions as to whether or not there might be additional banks that would come under pressure and potentially be at risk of failure.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Of the curve is that there's been a lot of inflows into a relatively short dated mutual funds or investment structures. Money market mutual funds are taking in a lot of inflows, short dated fixed income has seen a lot of inflows as well. And that's simply because other investors are asking themselves, well, why would I be extending out the curve when the highest yield that I can get today is at the very front end of the curve? So it's a different dynamic in terms of how investment activity has worked. And this does have broader implications throughout the economy, especially for entities like banks. Banks have to pay up to retain funds today, especially given that some of the relatively low yielding deposits have left for higher yielding alternatives elsewhere.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think the biggest difference is that your funding costs when you're in an inverted curve are typically above the levels that the bond market is yielding out the curve. So you're paying up potentially to borrow today to lock in a lower yielding asset, i.e. you're locking in negative carry. That's a very different environment. Typically most investors would be borrowing and in a normally or upward sloping yield curve. Borrowing at relatively low short dated rates and investing out the curve and picking up a higher yield. So it really does change the calculus of how investors are behaving. And if you want to borrow at an elevated rate and lock in a lower rate, you need to have great confidence that that rate's going to be moving lower. So yield down price up in order to justify those borrowing costs. Another thing that we see with the inverted shape”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yes, the bond market inversions, yield curve inversions, frequently have preceded recessions in the US that led many economists to predict last year that the US economy would be in a recession right now and the resilience of the US economy has surprised many economists, leaving aside the economic impact of why of an inverted yield curve in the funding markets, in the repo markets and in the bond investing markets that you traffic in what is different about an invertive curve? What kind of different incentive structures that make it a little bit different?”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, it's very different from the bond markets that at least I've known since growing up in the fixed income world and joining at the Fed in 2007. Two things stand out in this bond market today. One, the rate level. We're at really the highest rate levels that we have seen in almost two decades. And two, the shape of the curve. We're at the most inverted that we have been in decades. And both of these are quite unusual given the recent history that we've had in the bond market that had much lower rate levels. And typically upward sloping yield curves, or if they were inverted, those inversions were much shallower.”
2023-07-24 · Forward Guidance · Late Cycle Bond Trades | Mark Cabana on Mild Recession Case and Treasury Market Supply · IDENTIFIED FROM THE TRANSCRIPT