KBRA Analytics releases this month’s edition of The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show.
This month’s newsletter discusses the Federal Open Market Committee’s (FOMC) latest actions to raise rates and its plans to commence quantitative tightening next month. While the Fed plans to let reserves run down, it remains committed to maintaining levels above what it considers ample, and it also has the option of covering reserve shortfalls in an emergency through its standing repo facility. Given that the system’s ratio of loans to deposits is near its lowest points in decades, banks are planning to let deposits run off, especially nonoperational deposits from institutional money market funds, rather than try to retain the deposits by paying higher rates. However, this may prove to be a challenging goal given that while the Fed already reduced reserves by $1 trillion in the past half year, deposits increased nearly $0.4 trillion, and most bank treasurers say they would be satisfied and just expect deposit growth to slow rather than shrink. Banks are currently keeping 18% of their deposits in cash, earning 90 basis points at the Fed.
The newsletter also discusses the spread difference between the market yield on T-bills compared to the yield on the corresponding term Secured Overnight Financing Rate (SOFR), and it examines whether supply issues or the Fed’s holdings in its System Open Market Account portfolio could be contributing to the problem. But the overall trading volume in T-bills on average since the beginning of the year remains well above where it was for the same period in 2021. Meanwhile, individual investors, shut out of the ability to earn a higher rate with the Fed, may be flocking to the T-bill market, where the government’s website makes it very easy to open an account and invest. The newsletter also explores the backup in rates in the long end of the yield curve and compares the trend in mortgage rates, the term premium, and the break-even inflation rate. While bank treasurers remain reluctant to increase their current concentration in securities, they continue to book a significant portion of the purchases they have made in held-to-maturity accounts instead of available-for-sale.
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The Bank Treasury Chart Deck starts by profiling the relative volatility in equity markets, as measured by the CBOE Volatility Index (VIX), to Bitcoin, finding the latter to have been less volatile than stocks. The chart deck then looks at some of the underlying causes for volatility, including uncertainty about the economy and inflation. Uncertainty indices, constructed by monitoring the frequency of words like “uncertainty” and phrases like “stock market investing” in news articles, suggest that the public is more worried about the direction of the equity markets than the economy. Given the significant sell-off in equities so far this year, the chart deck concludes with a survey of retail investors who work with financial advisors conducted by the Investments and Wealth Institute in March 2020, which found that investors are inclined to be patient with sell-offs and to buy the dips