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Strategies & Market Trends : John Pitera's Market Laboratory

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To: Elroy who wrote (18557)	12/30/2016 1:54:05 AM
From: John Pitera	5 Recommendations Read Replies (2) of 33421

HI Elroy, the single most under reported story this year was how much of a massive % increase whixh occurred in the funding costs of the the so called safe money being held in the so called safe havens for cash. when I was sitting on our AUD bond and bill desk in Sydney at Citibank,we had a seriously inverted yield curve and the costs of funding our portfolio of bonds, swaps, Floating rate notes forward AUD FX ... all were costing us big money to fund each day as short term borrowing costs were higher than the bonds in our portfolio, everything in our swaps book...... even 90 day bank bills had negative funding... and this was after the AUD/USD had collapsed from one AUD buying $1.15 USD .. and then plummeted all the way down to .5730USD before stabilizing at about .60 You are getting killed owning any Australian denominated paper when it's going down 50% in 4 months and that leaves everyone with a serious case of fear about holding on to it...... in case there is a second round. So I have seen first hand the really serious and real balance sheet destruction that occurs from currency collapses and negative funding costs that burns your cost basis a few cents each and every day.... weekends and holidays included....... money wants to get paid everyday. Funding Markets1. 2016 was a monumental year for US funding markets as the prime money market fund rules went into effect. Most corporate treasurers are not allowed to keep cash in products with fluctuating NAV and therefore *were forced out of prime funds.* The sector *AUM collapsed.* 2. Financial commercial paper (CP) outstanding hit lows not seen in decades. this is still fall out from the GFC of 08-09 3. The above created a problem for foreign banks who relied on US CP to fund their dollar assets. The cross-currency swap *basis blew out, making it expensive for Japanese and European banks to convert their domestic borrowings into hedged USD dollar loans.* all of this lead to higher borrowing costs that received 1/20 of the coverage of the FED moving the FED Fund rate up.... but it had much greater and far reaching implications for the really large global Cash and near cash equivalent asset managers. easily the most under reported major story of the year. 4. In the third quarter, TED spread and the LIBOR-OIS spread blew out as foreign banks tried borrowing from US banks to meet their dollar funding needs.

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