Thanks for this article! Got me back digging into FRED. Looked up the SOFR rate, and the chart shows it’s actually been hanging around between 5.3 and 5.4 since about the end of July, 2023. The really worrying time IMO would have been between March 2022 and July 2023, when it rose in almost a straight line from near zero to about the current 5.3. Since then, it’s stayed pretty steady, which is amazing to me. It actually dropped to 5.35 last night.
Relatively speaking, I think holding long term at 5.3- 5.4 speaks of a sustained or structural moderate scarcity of quality collateral, but not a sufficient deficiency to potentially cause the system to lock up. A cause for watchful concern, to be sure, but not panic or imminent bank runs. The banking system seems to be operating relatively smoothly for now. What I see is reduced margin for error, though, in a global banking system that’s managing but not healthy.
A concerning sign, IMO, is the sudden spike in the 10-year yield. Jeff Snider suggested it may be due to Japanese banks being forced to sell a significant quantity of the bills for the purpose of purchasing dollars to buy Yen to keep theYen from falling further against the USD. The Japanese banks then need to reach all the way down to corporate junk bonds make enough yield to cover their losses on the Treasuries. And what are those bonds partially collateralized by? Commercial real estate! 😂😂 So as the CRE blows, the corporate bonds default, the Japanese banks collapse, the Yen implodes and Maynard Keynes rises from the grave to witness what his monetary ideology hath wrought. At least how I see a realistic possibility playing out. SOFR rates truly shoot through the roof at that moment, and a fat lady can be heard singing. She may still be muffled briefly by emergency bail-ins and true emergency overnight money printing by the Fed, but whether they could actually effect a rescue this time is up for debate.
So the SOFR situation bears keeping an eye on, for sure, IMO, in conjunction with 10-year rates and CRO performance. When 5.something becomes “the new normal”, I don’t see how the system can be “sound and resilient”. That just sounds too much like “safe and effective”, to me.
Thanks for this article! Got me back digging into FRED. Looked up the SOFR rate, and the chart shows it’s actually been hanging around between 5.3 and 5.4 since about the end of July, 2023. The really worrying time IMO would have been between March 2022 and July 2023, when it rose in almost a straight line from near zero to about the current 5.3. Since then, it’s stayed pretty steady, which is amazing to me. It actually dropped to 5.35 last night.
Relatively speaking, I think holding long term at 5.3- 5.4 speaks of a sustained or structural moderate scarcity of quality collateral, but not a sufficient deficiency to potentially cause the system to lock up. A cause for watchful concern, to be sure, but not panic or imminent bank runs. The banking system seems to be operating relatively smoothly for now. What I see is reduced margin for error, though, in a global banking system that’s managing but not healthy.
A concerning sign, IMO, is the sudden spike in the 10-year yield. Jeff Snider suggested it may be due to Japanese banks being forced to sell a significant quantity of the bills for the purpose of purchasing dollars to buy Yen to keep theYen from falling further against the USD. The Japanese banks then need to reach all the way down to corporate junk bonds make enough yield to cover their losses on the Treasuries. And what are those bonds partially collateralized by? Commercial real estate! 😂😂 So as the CRE blows, the corporate bonds default, the Japanese banks collapse, the Yen implodes and Maynard Keynes rises from the grave to witness what his monetary ideology hath wrought. At least how I see a realistic possibility playing out. SOFR rates truly shoot through the roof at that moment, and a fat lady can be heard singing. She may still be muffled briefly by emergency bail-ins and true emergency overnight money printing by the Fed, but whether they could actually effect a rescue this time is up for debate.
So the SOFR situation bears keeping an eye on, for sure, IMO, in conjunction with 10-year rates and CRO performance. When 5.something becomes “the new normal”, I don’t see how the system can be “sound and resilient”. That just sounds too much like “safe and effective”, to me.