Based on the latest report from Fitch, US money market funds’ exposure to European banks – dollar denominated commercial paper and repo loans to EU banks – declined by some 10% (in dollar terms) from the previous month
Yields on treasury bills with near-term maturities have spiked to multi-year highs as the debt ceiling deadline approaches. While market participants are generally expecting to see a resolution (albeit a temporary one), some are not taking any chances.
USA Today (AP): — Fidelity Investments, the nation’s largest money market mutual fund manager, has sold all of its short-term U.S. government debt — the latest sign that investors are increasingly nervous about the possibility of a government default.
|Source: US Treasury|
Institutional investors have rolled a chunk of their holdings into cash during September but in the last week or so started pulling out of government money market funds – moving funds into bank deposits instead.
Investors fear that their accounts will be frozen, as money fund managers who don’t receive timely payments on bills are unable to meet redemptions. Many money market funds also use repo (collateralized loans) with treasuries or agency MBS as collateral. These short-term loans usually yield slightly more than treasury bills, giving money markets a few extra basis points. But with bills under pressure and investors getting out, repo rates have suddenly risen as well.
Bloomberg: – “We’ve seen some rise in repo rates in sympathy with the broad move higher in money-market yields, most dramatically in the near-term Treasury bills, given concerns over the debt-ceiling,” said Andrew Hollenhorst, fixed-income strategist at Citigroup Inc. in New York. “October futures contracts have had a sharp yield rise, signaling expectations for significant moves higher ahead, consistent with the sharp spike we saw in 2011 before the August debt-limit deadline.”
Some continue to believe that a technical default by the US government would impact treasury securities only. But as we see from the repo example, that assumption is quite naive. An adjustment to bill rates is already rippling through a number of other money market instruments. If we don’t have a resolution on the debt ceiling soon, the shock will ripple across broader markets as well.
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Most people seem to have a hard time understanding why the markets do what they do.
The only reason I don’t is that I’ve been trading professionally for 30 years.
Not that I “got it” when I started out. I didn’t. I had to learn. And I learned much of what I know the hard way. I made a lot of mistakes. I studied my mistakes, I still do, just as much as I study what moves markets and what I get right.
I’m always learning. That’s because everything changes. You have to always take in new data, mesh it with recent data, layer it over the past, and not ever think you know for sure what’s going to happen.
So, how do you do it? How do you understand what’s going on with different markets?
Here’s how I do it (and get it right a lot)…
It’s First and Foremost About the “Big Picture”
I synthesize all the big goings-on, all the headline market-moving news and data points, and I watch and “listen” to how the markets react.
Money moves markets, but psychology moves money.
Markets are living things. They have feelings; their reactions are a direct reflection of the psychological impact reflected in the buying and selling of traders (first) and investors (distantly second) to the goings-on that participants believe will affect the decision-making of other market participants.