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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (18508)	12/14/2016 4:26:35 PM
From: John Pitera	1 Recommendation Recommended By 3bar Respond to of 33421

When the Fed Raises Rates, These Traders Make It Happen Traders at the New York Fed use a series of tools to implement the central bank’s rate policy The New York Fed trading room in 1953. The U.S. central bank used to control its benchmark federal-funds rate by buying or selling Treasurys, adding or draining the total amount of reserves in the banking system. But since the financial crisis, the Fed has flooded the system with reserves to keep rates very low, making it harder to control the fed-funds rate the old way. PHOTO: FEDERAL RESERVE BANK OF NEW YORK By KATY BURNE Dec. 13, 2016 1:12 p.m. ET When the Federal Reserve moves to raise interest rates, the action will be centered in a small room overlooking lower Manhattan where a digital timer hangs from the ceiling like a shot clock at a basketball game and a video camera links the central bank’s traders to their counterparts in other cities. Lining one wall are trading terminals and framed black-and-white photos of Fed employees carrying out market operations decades ago. Phones in the room provide the central bank with direct lines to Wall Street banks. Officials on the trading desk at the Federal Reserve Bank of New York, which implements changes in rate policy, have *spent more than three years tinkering with their tool kit for lifting borrowing costs.* Last December, when they raised the policy rate for the first time since 2006, their tools worked smoothly. Fed officials have done nothing to dispel market expectations they will announce a rate increase Wednesday at the conclusion of a two-day policy meeting. Any change would take effect the next day, likely making Thursday one of the most hotly anticipated trading sessions in a year. Most analysts expect a rate increase to go off without a hitch, although some anticipate gyrations in short-term interest-rate markets that key off the Fed’s benchmark federal-funds rate and more market volatility that typically stems from year-end funding constraints due to bank leverage rules. To raise rates, traders in the New York Fed markets division perform a series of maneuvers designed to lift the policy rate into the target range—which in turn influences other borrowing costs, such as Treasury yields and rates on mortgages, credit cards and business loans. The Fed traders enter higher rates into an electronic system called FedTrade. There is one version of the system for the Fed and another for banks and other Wall Street firms that are eligible to trade with the central bank. A set of Fed traders operates the FedTrade system, with at least one of the central bank’s traders in a separate location, linked by phone and videoconference, and an additional senior Fed official on the line. The phones in the operations room provide a backup for the central bank to call firms if there are problems with FedTrade. Since last December, the Fed has held the fed-funds rate in a range between 0.25% and 0.5%. When it next raises rates, it is likely to nudge that band up by a quarter-percentage point. When the implementation day arrives, the Fed will pay higher rates on the money banks park in their accounts at the central bank, called reserves. Currently, the Fed pays 0.5% on reserves. After the next increase, it is likely to pay 0.75%. That afternoon, the Fed will lift the rate it pays on trades called reverse repurchase agreements, or reverse repos. In these, the central bank borrows from money-market funds and others in exchange for Treasurys. A countdown clock appears when FedTrade opens for repos at 12:45 p.m. EST, which changes to yellow and then to red as the operation completes, generally by 1:15 p.m. Currently, the Fed pays 0.25% on reverse repos. After the next increase, it is likely to pay 0.5%. *As a result of these moves, the fed-funds rate is supposed to float between the 0.5% repo rate and the 0.75% rate on bank reserves.* This process was used last December to lift the range by a quarter percentage point. It was developed in recent years to replace the old practice, in which the Fed controlled the fed-funds rate by buying or selling U.S. Treasurys, adding or draining the total amount of reserves in the banking system. Small changes in reserves moved rates up or down. Fed staffers called bankers several times a day to get the prices of government bonds and wrote them on chalkboards. Those boards were erased for the last time in 1996. Since the financial crisis, the Fed has flooded the system with reserves to keep rates very low, *making it harder to control the fed-funds rate the old way.* siliconinvestor.com

To: John Pitera who wrote (18508)	12/20/2016 5:15:12 PM
From: John Pitera	3 Recommendations Recommended By benwood ggersh Hawkmoon Read Replies (1) \| Respond to of 33421

China currency, interest rate and potential for capital flight watch............ China1. As discussed before, monetary conditions in China have tightened in recent weeks. Concerned about the selloff in the domestic bond markets, the PBoC injected some liquidity into the markets last week. Nonetheless, the interbank rate continues to move higher: here is the one-week SHIBOR. 2. China’s bonds remain under pressure, with the selloff now hitting the short-end of the curve. Below are the 5yr and the 1yr government bond yields. 3. Corporate bond yields also rose as rumors circulate about redemptions from wealth management products (WMPs) who hold a great deal of China’s corporate debt (often leveraged). 4. China’s stock market is moving lower partially in response to the news that the housing rally has stalled (discussed yesterday). 5. In Hong Kong, the renminbi funding markets remain tight, with the 3-month CNH (offshore renminbi) HIBOR hitting the highest level since January. The second chart below shows the CNH HIBOR curve – now and a month ago. 6. The Hong Kong dollar (HKD) HIBOR is also on the rise as it converges with the US dollar LIBOR. Source: Bloomberg; Further reading 7. The USD/HKD risk reversal continues to rise as traders once again put on bets that the Hong Kong Monetary Authority will give up the peg to the dollar. Back to Index Emerging Markets1. The assassination of the Russian ambassador in Turkey put investors further on edge, sending the lira lower again. Source: BBC; Read full article