U.S. financial plumbing

Something is not right with the US basic financial plumbing. Despite the fact that the Equity markets keep getting all the attention, as it is often the case, the most important developments are in the most basic infrastructure. In the chart below, you can see the spread between the 3 year Treasury bond yield and the 3 year swap (fixed to SOFR). In normal times, this spread should be positive, as investors perceive the Treasuries to be less risky than swaps, which involve corporate risk. But in this instance, big leveraged players (hedge funds), following a hint by the Trump administration they might eliminate the standard leverage ratio rule, that assigns a risk weight to treasuries that make it more expensive for banks to hold those bonds on portfolios, have been betting (buying) heavily on treasuries financed (selling) by swaps. But then liberation day came up and bond yields were pushed up (by China and Japan) which have forced those big levered trades to be unwound. If this situation persists, the Fed may be forced to do something, perhaps cut rates to make sure the bond market keeps operating normally.

Want to know more? You can find all our posts at https://www.myfundamental.net/insights

#iamfundamental #soyfundamental #wealthmanagement #familyoffice #financialadvisor #financialplanning

#policymistake #ratecut #stagflation