SLR, Discount Window, Notes/Bonds, and Bitcoin - But Who's Keeping Track Anyways?

By davidgyoung | Alternative Investing | 11 Apr 2024


Sure seems like there are warning flares sent from time to time from those at the highest levels of the financial industry and markets.  To wit - recent commentary from those dealing with the riskiest instruments and odd suggestions from the Fed about the Discount Window. 

First, a couple of recent relevant posts from this platform:

BOJ Ends YCC After 20+ Years Supporting UST and Nobody Cares?

When is Checkmate for Bitcoin?

Bitcoin Loyalty Rewards

The CEO of the International Swaps and Derivatives Association, Inc. recently distributed an interesting letter.  When you see "swaps" and "derivatives", just think of adding a ton of risk and leverage to the system.  That letter can be found here.   In a nutshell - the CEO pleads with the Fed, Comptroller of the Currency, and FDIC to go back to covid era exclusions to allow banks to ignore all the crappy Treasuries on their balance sheet. 

Now why would he be asking the Fed, OCC, and the FDIC to do this?  We have some ideas.  Let's take a look first at some excepts from the letter.

swaps and derivatives

Our take:

When they say "facilitate participation by banks" - what they really mean is that the Treasury and Fed are going to force the Primary Dealers to absorb a gargantuan supply of Treasuries in the coming months and years.  Overall, this sounds like the guy with a very close look at risk is telling regulators they need to cut these banks some slack by letting them effectively ignore these instruments on their balance sheets when assessing risk and liquidity.  This also means this particular person must either know or strongly feel that this enormous issuance of Treasuries is coming and the banks will be on the hook partially (they can go after the public for support via 401Ks and IRAs). 

Recently the Fed has been vocal about how cool the Discount Window is.  Yes, the Fed has been out working the media with this message about the Discount Window stigma.  If anything, the Fed might make it even worse as the Fed itself talking about it can make people want to dig deeper and learn more. 

Nonetheless - here is an example:

discount window stigma

Our take:

The Fed is blasting out a big message to banks in general telling them "hey many of you will need the Discount Window, get over it and use it".  If banks are using the Discount Window in rising numbers then the equity market won't care about anything the Fed was trying to say when looking at banks.

You didn't think Yellen could get away with ONLY offering new bills while avoiding notes and bonds did you?  Here is a very recent auction below of 10YR Notes - long term debt.  The results were not pretty.

ten year note auction

Our take:

Auctions for bills recently have been red hot because the market is front running the Fed.  The Fed already jawboned a "new asset purchase program" focused on hammering the short end.  As you can see above it is much tougher to sell long term debt.  This confirms what we have been saying for years now and certainly in the last handful of months.  There is a GARGANTUAN amount of debt coming to market and the market is getting a lot more nervous about the long term stuff (and very rightfully so). 

Conclusion:

- those that know a lot about risk and leverage are pleading with regulators to cut the banks some slack so they can try to absorb all this debt issuance

- the Fed/Treasury will jam UST down the throats of the banks in an effort to engineer enough buying power to absorb UST in the coming months and years

- the Treasury will be selling/refi a TON of debt

- the Fed will have to initiate QE, hammer the short end down, and pray the long end doesn't implode

- the Fed is even telling banks to get ready to use the Discount Window.  This is because the Fed knows the holes in their balance sheets will first get worse before they repair over time

- recent auctions show gathering buyers for 10YR or 30YR will be tough.  Expect YCC eventually. 

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davidgyoung
davidgyoung Verified Member

BTC since 2013. Investor. Entrepreneur. Always looking to learn and develop.


Alternative Investing
Alternative Investing

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