The Shadow: How the Fed helped spawn a $23.7 trillion market
America, early fifties. From these dark times, a hero – of sorts – emerges: The Shadow. Now distrusted by many and vilified for its role in the Great Financial Crisis, shadow banking was birthed seven decades ago to solve economic dilemmas that have eerie parallels with 2022. And this murky entity may yet hold the key to the future smooth functioning of the $23.7 trillion market for US Treasuries, and by extension all of global finance. (Bloomberg | Nov 7)
Supreme Court signals it may allow court challenges to SEC, FTC
The US Supreme Court signaled it may open a new avenue for companies and people to fight off complaints by the Securities and Exchange Commission and Federal Trade Commission, hearing arguments in cases that could undercut the clout of two powerful market regulators. The justices are considering whether those facing agency claims can go straight to federal court with constitutional challenges — including attacks on the use of in-house judges to handle cases. Critics say the system gives agencies an unfair home-field advantage. (Bloomberg Business | Nov 7)
Wall Street's alchemists turbocharged wild swings in Treasuries
Over the last decade, as rock-bottom interest rates depressed returns on fixed-income assets, the alchemists of Wall Street came up with a solution for investors who needed fatter yields: a whole series of complex products that spun extra basis points out of comatose markets. Now, amid the worst bond rout in at least five decades, firms have been scrambling to hedge their positions, piling into derivatives that benefit from higher volatility as they seek to limit the damage. (Bloomberg Markets | Nov 8)
Big hedge funds shop for bargains in corporate debt markets
Big-name hedge funds are snapping up bargains in junk bonds and other corners of the corporate debt market, as they bet a sell-off sparked by the darkening global economic outlook has gone too far. Corporate debt has been hard hit this year by fears that steep increases in borrowing costs will lead to a wave of defaults at groups that have grown accustomed to years of easy money. Interest rates for risky borrowers have soared. (Financial Times | Nov 8)
Nagging U.S. Treasury liquidity problems raise Fed balance sheet predicament
The U.S. Federal Reserve's ongoing balance sheet drawdown has exacerbated low liquidity and high volatility in the $20-trillion U.S. Treasury debt market, raising questions on whether the Fed needs to re-think this strategy. Intended to drain stimulus pumped into the economy during the Covid-19 pandemic, the Fed's quantitative tightening (QT), as it is commonly referred to, has been running for the last five months. The Fed's balance sheet though remains at a lofty $8.7 trillion, down modestly from a peak of nearly $9 trillion. (Reuters | Nov 8)
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