The dollar lost a percent today. Treasury bill holders are getting the cold-shower introduction to “risk-free investing.”
Interfluidity wonders what will happen 28 days from yesterday, when the repo notes issued by the TLSF — god, these acronyms are getting annoying — expire.
When the TAF program was first announced, it was billed as a temporary facility. The announcement was in December, and some suggested it was intended to help banks meet end-of-year balance sheet needs. Four auctions were announced, two auctions of 20B in December, and two January auctions for an amounts that has not yet determined. An important question at the time was what would happen 28 days later, when loans made via two December auctions expired. Would the amounts of the January auctions be the same as the December auctions, effectively rolling over the TAF loans (not necessarily to individual borrowers, but to the consolidated banking system)? Would the January loans be smaller, indicating a gradual phase-out consistent the temporary nature of the program? Or would the loans be expanded, suggesting an ongoing intervention of indeterminate scale? Since then, the size of the program has more than doubled, and the Fed has announced explicitly that it intends to continue the program “for as long as necessary to address elevated pressures in short-term funding markets”.
In the past few days, the Fed has announced two new programs, and again, we are left to wonder what happens 28 days later. This weekend, I argued that since the Fed cannot retire loans made via TAF and its repo program without adding to those “elevated pressures”, the loans should be considered an equity infusion, because they’ll be repaid at the convenience of the borrower rather than on a schedule agreed with the lender. Does the same argument apply to the new Term Securities Lending Facility (TSLF)? On face, it’s harder to view TSLF as an equity infusion, since the Fed is giving no one any cash. (In fact, the Fed will withdraw some cash as interest.). Eyes unprotected by green shades will glaze over at descriptions of a kind of asset swap, where some obscure assets are “pledged” to the Fed while other boring securities are lent to firms.
But to firms holding illiquid securities that the Fed is accepting as collateral, the program is equivalent to a not-so-efficient cash infusion, because the Treasuries the Fed is lending are liquid and can be converted to cash easily in private markets. From a cash-strapped firm’s perspective, borrowing a treasury, then borrowing cash against that Treasury in ordinary repo markets, is equivalent to borrowing cash directly from the Fed, except that there’ll be an extra middleman to pay. So, this new facility might well be a form of equity, if the Fed is willing to roll it over indefinitely and require payment only at the convenience of borrowers. We’ll have to wait and see what happens, 28 days later.
I forgot about that, that the temporary rationale for the TAF was all about “helping banks balance year-end commitments.” What a joke that was.
A trader understands that liquidity has a price. The Fed obviously does not: it’s allowing banks to exchange ‘AAA’-rated asset-backed securities and collateralized mortgage-backed securities for AAA Treasuries–even though the spreads for AAA CMBS have blown out to 30 times a AAA rating.
Remember August-October when the world was gonna end because AAA CMBX spreads had “blown out” from 6 bips over Treasuries to 30? We’re north of 250 over Treasuries now … and people can swap this garbage for Treasury notes.
Anyone who continues to trust “the full faith and credit of the United States government” [sic] deserves to be fleeced.