The writer of this piece, Tracy Alloway, is one of the Alphaville Illuminati embedded in strategic positions around the world. And, as a side-note, it is always the seemingly sweet ones who turn out to be borderline insatiable yield curve phreaks.
From Bloomberg via Yahoo Finance, June 9:
In the aftermath of the 2008 subprime crisis, regulators became determined to stamp out the kind of funding stresses that had brought the financial system to its knees. Efforts at shoring up the system included new liquidity requirements that required large banks to hold big buffers of ostensibly safe and liquid assets that could be used to protect against outflows.
These portfolios typically fall under the umbrella of High-Quality Liquid Assets, or HQLA, but another way of thinking about them is as a form of bank bondage — a requirement that forces banks to keep large amounts of generally low-yielding securities like U.S. Treasuries (which can be used as collateral in the repo market), agency mortgage-backed securities (MBS) and reserves — on their balance sheets.
Like the famous Henry Ford maxim about customers being able to have “a car painted any color that he wants so long as it is black,” banks are able to tweak their HQLA portfolios so long as they consist solely of the things that fall under the strict regulatory definition of “liquid.” (Never mind, of course, that the rules arguably left banks more intertwined with the repo market in the aftermath of the 2008 crisis, a vulnerability which would come back to haunt them in 2020). You’ll typically find HQLA portfolios ebbing and flowing alongside available yield and interest rates.We bring it up because one of the more interesting bits of market moves in recent weeks, or lack thereof, has been in U.S. Treasuries, where yields have remained stubbornly range-bound even as concerns over inflation seem to grow alongside the issuance of new U.S. debt.There’s an argument to be made that the events of 2020 incentivized banks to snap up U.S. Treasuries for their HQLA portfolios in a way they haven’t really done before; buying $350 billion worth of the bonds over the past year or so. In other words, bank bondage could go some way
towards explaining the apparently sanguine stance of the debt market towards the prospect of higher inflation and larger supply. As the Fed Guy blog puts it:....
....MUCH MORE