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Fed Funding Treasury PDF Print E-mail
Written by Burnham Banks   
Tuesday, 23 September 2014 04:30

The current interest expense on public debt of the US treasury presents an interesting picture. Given the current term structure, 2 year treasury FRN’s are an extremely attractive means of financing. They trade at some 4 basis points over 3 month T bills, which trade at about a basis point.

Assuming that the 3 month T bill trades up to 230, which is where the 2 year 2 year forwards are trading, this means that the existing stock of FRNs would see an increase in interest expense from 0.01% of total debt service, to 0.6%, an almost negligible increment. The math changes if the issuance accelerates. If we cynically assumed that the Fed worked only for the Treasury, a CFO would look at the trade off of financing between 2 yr fixed and the floating rate, in 2 years time. If the 2 yr rate was 230, then what latitude would the Fed have in raising interest rates? It turns out, quite a lot.

Unfortunately, at this point, I have not the resources to conduct a thorough study of the US treasury’s funding needs and planned issuance and what a rational CFO would structure the balance sheet. Let's see if I can co-opt the research team to do some work for me...

Just as an aside and an aide memoire…

For the year 2014, UST issuance will roughly look like:

160+m of 2y FRN

168m of 30y

260m of 10y

350m of 7y

420m of 5y

340m of 3y

360m of 2y

Global Macro: Deglobalization, Inequality and Country Risk Premia PDF Print E-mail
Written by Burnham Banks   
Monday, 22 September 2014 00:25

Globalization and the opening of trade and capital between countries led to a reduction in income and wealth inequality between countries. The mobility of financial and intellectual capital also led to a widening of inequality within each country. Since the global financial crisis of 2008, countries have had to reexamine their economic and commercial models. Domestic inflexibility has led many countries to pursue mercantilist policies aimed at gaining a competitive advantage over trading partners. Re-shoring is an example of a large scale, secular theme associated with mercantilism. From 2008, the world has witnessed a slowing of globalization. Countries have incentives to deglobalize. Large, developed countries with sufficient domestic demand will pursue this strategy while traditional exporters who have weaker intellectual property generation capabilities are likely to recognize the balance of power and pursue their own domestically focused policies. Deglobalization is likely to lead to a divergence in income and wealth between countries, reversing the trend of the period of globalization. There is no evident impact on income and wealth inequality within countries. That is left to a separate analysis. Country risk premia have diverged since 2008, most notably within the Eurozone, albeit for reasons surrounding the robustness of its currency union, and appear to be driven by deglobalization. This is a long term trend with implications for security valuation across equities and credit globally.

Scottish Independence PDF Print E-mail
Written by Burnham Banks   
Monday, 08 September 2014 01:43


Whether Scotland gains its independence will not only be a question of logic and rationality but of nationalism and emotion as well. Why do the Scots want independence? Why not? Some 300 years ago Scotland was an independent country. Lately, every 18 years, the Scots have brought up the issue of independence.

Scotland wants to decide what’s best for Scotland. It clearly believes that the decisions in Westminster have not been optimal for Scotland. This is the single most compelling argument for independence. It believes that the revenues from North Sea Oil have been squandered or misdirected and that an independent Scotland could follow in the footsteps of Norway with the creation of an oil financed Sovereign Wealth Fund. It feels that Westminster has neglected Scotland generally, but particularly in investment and infrastructure. Be that as it may, the calculus around North Sea Oil is equivocal. At current production, reserves are expected to last 30 years. Independence is expected to last longer than that.

Lately, indications are that the pro independents will win the referendum. There are issues to be addressed in the event of a separation.

The currency is an important consideration. An independent Scotland will need a currency. It currently uses the sterling pound. Scottish bank notes are not in fact legal tender anywhere, not even in Scotland, and are therefore legally a form of promissory note. Scotland will have to establish a currency and decide on the basis o that currency, whether it will continue to use sterling as part of a currency union, use sterling without a currency union, join the Euro or have an independent currency and central bank. Options 1 and 3 require the concurrence of the BoE and ECB respectively. Either will impose conditions which will likely severely limit monetary policy independence.

In any divorce, the balance sheet needs to be divided. This includes assets and liabilities. Each side wants the assets but not the liabilities. The Scots will understandably claim the North Sea oil reserves as their assets. How exactly the national debt will be distributed will be interesting to see. The question goes beyond the proportion of the national debt that gets allocated to an independent Scotland but to defining the new conditions of default for English and Scottish debt.




Last Updated on Tuesday, 09 September 2014 04:46
Policy Fatigue in Europe PDF Print E-mail
Written by Burnham Banks   
Thursday, 18 September 2014 23:33


There is policy fatigue in Europe. The recent LTRO has had poor take up, a mere 83 billion eur compared to 290 billion at the first 3 year LTRO.

The first LTRO allowed banks in the euro area to do something they had not been able to before, to trade out of their foreign debt and into their local debt, and to buy more bonds. It was an outsourced QE. The current LTRO allows banks to do nothing new. In fact, the conditional nature of this LTRO makes it less attractive. Moreover, the euro area banks are in the midst of recapitalization and until this is done, LTRO’s are merely liquidity operations that require capital for animation, capital which is yet scarce.

This is positive for Europe. A ‘big gun’ solution might be a better analgesic but this current incremental policy provides a protracted and incremental support for European risk assets. It is, to be clear, a dangerous game, but it lifts the market steadily. Given the tepid response to the LTRO the ECB will be forced to do more, and do more it will.

Let me make a wild and reckless forecast. The ECB will design a TBA market for ABS underwriting not only secondary market ABS but blind pool primary issues, in effect co-opting the commercial banks to be their originators.


Last Updated on Thursday, 18 September 2014 23:35
The Putin Problem PDF Print E-mail
Written by Burnham Banks   
Friday, 05 September 2014 06:47


What does Putin want? It’s not clear. It’s likely he wants more than Ukraine. Those who believed that he would stop with South Ossetia and Abkhazia were wrong.

What drives Putin? Avenging the humiliation of the USSR is a clear motivation. Having held arbitrary power within the KGB, he longs to exercise it again. He does so within Russian territory but he longs to exercise it at least to the extent of the old Soviet boundaries.

How does Putin operate? He sows discord among his enemies. He knows when to hold and when to fold but he’s always at the table. He doesn’t need allies, only that his enemies are not completely aligned. He relies on his enemies not being committed to action, a glimmer of fear, a seam of pacifism.

He lives by obfuscation, behaves erratically, arbitrarily and disingenuously. In a word, he is capricious.

Those who engage him are bewildered by his irrationality, a gambit he employs well. They misread him. The illogic is designed to confuse and to conceal a deeper logic which is only revealed when it is too late. Putin needs to be dealt with firmly. Europe’s prevarication plays into his hands. Their measured and considered approach is based more in hope than experience and they will pay for it. This man does not mean to stop at Ukraine. Nor are his ambitions circumscribed by geography. He is a danger to Europe and to world order. Deal with him meekly and the world will pay.


Last Updated on Friday, 05 September 2014 06:50
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