The Fed Manipulated SOFR (2)
The Federal Reserve has manipulated SOFR again. This time not by replacing the actual trade data by a survey of dealers but by directly trading will dealers at off-market prices. The bail-out trades (overnight repo operation) have resulted, as intended, in lower reported SOFR rates.
It is true that the rates were originally distorted higher due to government intervention, and the Federal Reserve, an other government body is intervening to distorted the rates lower. The results of all those interventions and distortions is that we don't know where the market really is.
And the regulators are pushing for this heavily distorted number to be the base of the interest rate market. What could go wrong with such a system?
As I'm at it, the CCPs are pretending that they can summarised all those distorsions into a big bang change from EFFR to SOFR for collateral PAI and discounting using a simplistic valuation mechanism for compensation. And ISDA is asking how to compute the spread between the bank manipulated LIBOR and the Fed manipulated SOFR to be used in the next 50 years in a neutral way using simplistic average done on a couple of years of proxy data. Really, I wonder what could go wrong!
On the Federal Reserve manipulated the SOFR rate: The Fed resorted to a Repo facility with a maximum notional of 75 billions for several days in a row. Somewhere in that period the SOFR was at 5.25% and the 99 percentile of the market rates was at 9.00%! The treasury repo facility had a lower rate at 2.10% and a higher rate at 3.25% in an actual volume of 40 billions. Note that on the same day, the Fed Funds volume was 61 billions. I'm a little bit lost between those contradictory figures.
Why do I say that the repo rates are "distorted higher due to government intervention"?
Government is organising tax collection on the same day for all corporate, this leads to a shortage of liquidity on that day. What if government was forcing you to eat all your fruits and vegetables for the month on one specific day of the month. Don't you thing there would be a distortion of the fruit and vegetable market on that day? Government regulators are using discrete measures of balance sheets for regulatory perspectives, for all banks on the same day known well in advance, another distortion on that day. The treasury is issuing a lot of treasuries and bills on the same day and forcing primary dealer to buy them; another distortion. They could spread the issuance during the month. Or they could decrease the issuance by running a balanced/surplus budget like most of the well organised individuals and corporations.
P.S. I still have not found a clear explanation of what exactly went wrong on the 31 May 2019 when SOFR was based on a survey (and not on transactions).
It is true that the rates were originally distorted higher due to government intervention, and the Federal Reserve, an other government body is intervening to distorted the rates lower. The results of all those interventions and distortions is that we don't know where the market really is.
And the regulators are pushing for this heavily distorted number to be the base of the interest rate market. What could go wrong with such a system?
As I'm at it, the CCPs are pretending that they can summarised all those distorsions into a big bang change from EFFR to SOFR for collateral PAI and discounting using a simplistic valuation mechanism for compensation. And ISDA is asking how to compute the spread between the bank manipulated LIBOR and the Fed manipulated SOFR to be used in the next 50 years in a neutral way using simplistic average done on a couple of years of proxy data. Really, I wonder what could go wrong!
On the Federal Reserve manipulated the SOFR rate: The Fed resorted to a Repo facility with a maximum notional of 75 billions for several days in a row. Somewhere in that period the SOFR was at 5.25% and the 99 percentile of the market rates was at 9.00%! The treasury repo facility had a lower rate at 2.10% and a higher rate at 3.25% in an actual volume of 40 billions. Note that on the same day, the Fed Funds volume was 61 billions. I'm a little bit lost between those contradictory figures.
Why do I say that the repo rates are "distorted higher due to government intervention"?
Government is organising tax collection on the same day for all corporate, this leads to a shortage of liquidity on that day. What if government was forcing you to eat all your fruits and vegetables for the month on one specific day of the month. Don't you thing there would be a distortion of the fruit and vegetable market on that day? Government regulators are using discrete measures of balance sheets for regulatory perspectives, for all banks on the same day known well in advance, another distortion on that day. The treasury is issuing a lot of treasuries and bills on the same day and forcing primary dealer to buy them; another distortion. They could spread the issuance during the month. Or they could decrease the issuance by running a balanced/surplus budget like most of the well organised individuals and corporations.
P.S. I still have not found a clear explanation of what exactly went wrong on the 31 May 2019 when SOFR was based on a survey (and not on transactions).
Comments
Post a Comment