Citi's "When the Disco Stops"
Citi Research published a piece entitled, "When the Disco Stops." It says, "Since the money market reform in 2016, the 2a7 community has been refinancing 50% of FHLBs debt via discount notes and FRNs. We expect two exogenous shocks in 2018 for short term markets - Fed normalization and bill supply. These could have implications for FHLBs issuance behavior next year. Given FHLBs central role in financial plumbing, we expect impact on a wide range of funding rates including CP, LIBOR and fed funds.... Upon bill issuance early next year, agency discos and FRNs are bound to cheapen up in tandem, which could reduce the margins for FHLBs." Author Steve Kang notes, "FHLB was a blessing only available for US banks (especially larger ones). The outbound foreign banks (such as the Japanese), who had dollar funding needs to escape limited domestic yields, had to rely on more flight-prone and LCR-unfriendly funding sources such as CD/CPs. As money market funds drained these deposits from foreign banks, XCCY and LIBOR basis widened, which would be a proxy for foreign funding rates. On the flip side, government funds received $1tn outflows of prime and took down large amount of GSE discount notes/FRNs as it offered nominal yield pickup over T-bills(3M tenor is currently offering -2bp yield pickup). As of now, 2a7 community is financing more than 50% of total FHLB debt ... and advances continue to increase. We now review the FHLBs role in term and o/n funding markets." See also, our `Nov. 2 News, "OFR Paper Examines MMF Reforms, Shift to Govt, Holdings of FHLB Debt.") In other news, The Federal Reserve Bank of New York again updated its "Reverse repo counterparties list. Their statement says, "Credit Suisse AG, New York Branch is no longer a reverse repo counterparty, effective November 13, 2017."
