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Markets Update: The Fed's Recent Efforts to Increase Liquidity

2020-03-13

Alex Blanchard of Goldman Sachs' Global Markets Division analyzes the Fed's recent decisions to increase liquidity amidst market volatility.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
Welcome to our exchanges of Goldman Sachs Markets update from Friday March thirteen each week we say: our leaders across the firm to get a quick take on the markets on Jake, see what today's gases Alex Blanchard of our global market division. I also welcome this programme money, doing I'm having so ouch could they explain you role here the firm and who your main clients are Joshua, I'm responsible for the firms, global short term rates and rip up business. A wee wee typically interact with large institutional clients across the level by and large asset managers and hedge funds, as well as large money market founded in the two I haven't complex or at once. since the reaper markets been in the headlines. Give me a just a quick overview of what happened in that market in recent weeks, the absolute We saw early signs of pressure over the last couple of weeks and, while a much of that was, it is manifesting itself
and away from the pot in a market that most people had been focused, most specifically overnight, repo market. Let us have it appeared a time when perhaps the observers might that things were world com, but I am reality. Things are far from com. Essentially, what we ve been saying is a an increase was the financing both in retail markets for liquid securities, as well as in the commercial paper market. On his, in the offshore financial markets, notably the across currency bases market. If I just just trying to pack that, essentially what what happened was was a combination of factors, first being as be the market to thought it to price. Change expectations for monetary policy. The money market curve inverted, as happened money market investors who are the marginal supplier of funding liquidity entered into the space, typically in that region, tend to shorten the duration of their asses hypo folios differently. It ok, they are focused highly on advertising
yield rather than Carter Return. There incentive is to keep it, in the other night repo Mountkid a note, lend it to your s. Emily wants to borrow it for three months or six months, and so the the cost of financing the people who do need to borrow for three months six months, definitely have to increase at the same time, what we started to see is, as we have been heightened levels of volatility and in market was a drain liquidity across the system, if you think about in banks a posting receding margin to one another, all the time and alongside the large client, you know when I, when I most margin. I pay cash away from from my report as, while you then I'm posting to you and are able to give that cash to your repo desk. There's some delay in that and that process to these two afraid that the I've used. Historically, the velocity of reserves is not as high that needs debate and so openly not made under. This system requires more reserved
this is then, finally, finally Fiona this is business then tilted into the treasury market. Normally the other a lot of investors who would would buy security is when I looked cheap, unselfish purity, don't I looked expensive or by one security versus the underlying derivative, but given the focus on on, I M all asset liability management from both of them and the banking sector, they which may appear here some virtuous- did almost become self fulfilling and and thus to become some a pro cyclical Those are we quickly more more pressure and under the levels that we reached in various funding market is, is reaching its very, very stress levels. So The treasury market is is typically one of the most is the largest most liquid markets in the world, so the FED he responded this week injected capital and that market, amidst all the volatility. What what signal where they trying to send an and what's been the impact that, since the announcement request, her
instead of being nothing grappling with it. What is it I need to do and how we will remember the period of time during September of last year when there was other, was a lot of pressure on the repo markets and then the FED responded by injecting result into the system Noah to help banks provide mole lending to those who need it to underwrite some dislocations. They ve done. They ve done something larger, over the past few days, initially responding with a combination of around three hundred billion dollars of of time operation and then, additionally, they announced a total of one point: five trillion dollars of of time operations across one month three month. Lending the response from the market has been interesting. Mc is merely the pain. But that one and a half trillion dollars of lending was less than a hundred and twenty billion dollars concerning their doesn't. It
highlights the challenges uzumaki faces way that they were trying to just step both size and price, bye, bye, a friend as much possible cash to they could they said they say to the market. You don't need to pay it in a competitive election process. You don't need to pay more than the kind of regular market, clearing away fidessa. We want to already type and spread the train in a report, financing and monetary policy But the bank's essentially responded by saying increase our balance sheet in order to take down. Your reserved and lend them out here, what their them It is a cry out for it in a more direct injection, now, literally in the lost half an hour, the threat of announced, an additional operation where, alongside a temporary of market operation that they have plans to buy a combination. the Us Treasury securities across the curve cosmetics month, they have announced today that they will be by thirty seven billion dollars today alone. So, instead of spreading out, there
The total operation acrostic across the month and making making more decisive action today so what does that mean now for you as treasuries and another in risk assets operating those two points for you, a treasure you expect to see, and we started to see a rich man in your treasuries. Verses underlined derivatives, thirty swaps, bride of the rich and the best part of ten basis. Point by point, as we speak since the announcement Getting the feds are doing what they can do to get cash directly enter into the system, and that should help in some part. Although what is really not doing it, it's pulling forward, the injection does not necessarily injecting more catches. You saying that in this system, having to wait to get in a more caution to system will do at all today, so A united should help, but I'm not obvious to me that it has had a drastic impact. The realities you need in a more
underwriting of earlier these dislocation and more ability to do so. Seemingly ah, but the only one who can do that risk assets anywhere that separate and distinct highly, while some of these dislocation of being driven by moved and risk assets sharks driving behaviour from investors, either reduce rest on appealing to increase risking their business locations. When you, when you remove these locations, that doesn't mean that people's perception around you know, what's going on in the world, has necessarily changed and the bear their inclination to buy started has changed. So how your clients, responding to this, this very volatile environment they advantageous, taken risk offer they in active. I try to mix across a different complexes retouch. There are certainly some risk reduction. People run in a very, very tight risk limits across different institutions, and that has definitely been some degree of risk, reduction,
you have in those volatile, but also in markets by DR substantial dislocations from evil for sin, beginning the rotation from some investors who are purely sourcing, their long day situation and derivative products. They are starting to to deploy some of their long, to duration into Treasury product that essentially Mayer on winding received six swaps and buying yours treasuries too, in order to rich written treasuries. Thus, swaps and another that from now on, they money market about whose, where a lot of this all all begin at its initiatives, that can talk is whether a continuing to have large and flows as as risk assets go down oversee the amount of cash held by market fund increases because you and I take up money out of buildings and but into money fun answer you had some. I like
three billion dollars cash into the money market complex, which is which is bearing on four trillion dollars right now, there will continue to keep the money very, very short term, their willingness to lend our will only change one. The right has started, and then the preamble want their money. Market can add word. So there are few. The market is looking for from the combination of of the sudden and the Us Treasury The market is crying out for a substantial and she's right cut from from the FED the markets, pricing, the better part of a hundred this point or a hundred basis points over the next week. They simply does now. The egg lay moving around two zero, too five basis points, and that needs to happen. In order for the money market have to disappear, and then the question will be what we want. Other tools are the fad have in order to check out what's going on in short term credit markets, and so we would expect them to to use some company asian. All facility hey used in during two thousand
by the time Ocean facility at the time by lending facility in order to provide direct capital to to short term credit market. At the same time, also watching very closely, what's going on offshore financial market and across currency basis, which is something that a lot of people will watch where give the market is currently implying that for Japan, he's mank to lend yen and dollars. The any average Castilla over the course of the last year was in the order about thirty or forty basis by and is currently around two hundred babies points. have a facility the way they have in place, where they allow central banks to lend local car the embargo dollars in that struck. At fifty basis points and, and though the market price him way beyond that, this appears to be some stuff
attached to the use of other swap lie. So we think that their defence should work collectively with global central banks to one of the EU or both changed the right that is charged on the ethics of lines, but also ensure that other global central buying and encourage the use of them in order to avoid business locations, because the alternative of of not enemies to need these things are very impact, hold way beyond you, and I talking here about the funding market instead the fact, the real economy and the two places I am most concerned ours as follows. The first, if you continue to say that this location, in the cost of borrowing, for four japanese bank, then then they will have no choice to pay whatever it costs, to borrow money and in the short term, for the market and the commercial piper market, and I will not have an impact on the cost of financing for financial nonfinancial corporate. The second is, if he, if you can, Did you see the locations between?
was treasurer is on, and I underline derivatives both one that we watch very closely, as is the they pay different evaluation between the cheapest to deliver, It? Is an? U S: Treasury futures contracts that future itself which exists. Really Because there is a large by a base of features and management community who are during their long dated liabilities with just contract and then investing their cash into and credit product. And then they are. not by buy those peaches, because somebody selling them to them. Obviously the fellows are people who are buying. U S treasuries and then selling t a not spread that that implies spread, as typically being around forty or fifty basis points. That's upwards of two hundred babies point currently and is getting it getting to levels now where it makes more sense for the manager to stop buying futures contracts to catch their duration. Stop buying credit has a cash reinvestment.
on the point of cash entirely into your treasuries. Could your treasuries looking extraordinarily key persons things around them that wouldn't by a good outcome for the functioning of the credit markets? And while we we lookin the things that we follow very closely infranatural it seemed to be purely a financial instrument. Anonymous touching the real economy quality is the thing tat. I could dont have a very marked impact on the real economy society, mention that the markets looking for some of that await playbook to come back for applies and in terms of action facilities and the like are there any any other big measures at the fat or treasury might be considering or that the market is, is looking at more creative, newer versions of measures to to restore some little equity and stabilize markets. Sean what what what they might consider and similar to what we came from other several times over the last few days is some form of
regulatory relief in the short term, and I want to be one of the aims of this picnic current market him environmental. Highlighting is that there is some element of The regulations which is pro cyclical and so to the extent that were able to provide more lending into this environment. Robin bless. Lending in this environment would actually help back done through either tweak through to the liquidity coverage ratio, allowing banks to two recompose they're, holding it away from the liquid security than to credit product at the same time, at opening way the facilities. You just touch they didn't, I wonder now the tumult of authority in the like open Thirdly, in it, some kind of relief on on the new the new proposed stress capital buffer. to allow banks to grow that represent an and be more more present, an and providing and mediation capacity, which is essentially what is constrained, currently interests
This I also system talk about buying off the run bonds that was done when the yes treasuries running the surpluses is very talk about. Coming back, there's been some written commentary around that meaningful dislocation of the treasure complexes it exactly about space, shaken the author and so the school girl from the US government have been as they are, and we had a heightened levels of issuance by definition that create or more after on securities everytime, you assure tenure security, then he alighted night now, no longer the on their own security. All and oceans, like alighted no longer than a large. Currently under you get more more off the Rwandan. Most liquidity continues to get in there and then the least locations in Paris. the distress or in periods where private capital, unable or unwilling to underwrite they become more moral liquid. recommendation that around the Treasury being both to buy back some of the other.
author and security, the men issuing do on their own securities would would certainly help remove some of these applications. Well. Outs: unfastening. Disgust thanks for joining us today with my pleasure autonomy I hope we will have to have you back regularly, but by those great have you on behalf of that I agree that hope, not that's all for this week's market update on exchanges of Goldman Sachs thanks for this, in Tunisia again next week for more updates on the volatility? In case you mean, It was in this past tuesdays episode with chief curry of Goldman Sachs Research books by What's going on the oil market after the sharp drop in prices there, this podcast was recorded on March thirteen, twenty twenty all price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or Iraq.
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Transcript generated on 2021-07-02.