SIFMA, the Securities Industry Financial Markets Association (formerly the Bond Market Association), published its latest "Research Quarterly, Fourth Quarter 2017" yesterday, which contains a brief update on various money market instruments." The section on "Funding and Money Market Instruments" comments on "Total Repurchase Activity," saying, "The average daily amount of total repurchase (repo) and reverse repo agreement contracts outstanding was $4.13 trillion in 4Q’17, an increase of 3.3 percent from 3Q’17’s $4.00 trillion and an increase of 1.1 percent y-o-y. For the full year, the average daily amount of total repo and reverse agreements was $4.01 trillion." We review SIFMA's update below, and we also quote from Wells Fargo Funds' latest monthly commentary.
SIFMA explains, "Average daily outstanding repo transactions totaled $2.31 trillion in 4Q'17, an increase of 3.4 percent q-o-q and an increase of 2.8 percent y-o-y. Reverse repo transactions in 4Q’17 averaged $1.82 trillion daily outstanding, an increase of 3.08 percent and a decline of 1.1 percent q-o-q and y-o-y, respectively."
Regarding "GCF Repo Rates," SIFMA writes, "DTCC general collateral finance (GCF) repo rates increased again for Treasuries and MBS in 4Q’17 on a q-o-q basis and y-o-y basis: the average repo rate for Treasuries (30-year and less) rose to 122.4 basis points (bps) from 3Q’17’s average rate of 110.6 bps and 4Q’16’s average of 43.5 bps. The average MBS repo rate rose to 124.3 bps from 113.4 bps in the previous quarter and 46.0 bps in 4Q’16."
On "Financial and Nonfinancial 3-Month Commercial Paper Interest Rates," they tell us, "Interest rates for nonfinancial commercial paper (CP) rose to 153 bps end-December 2017 from 125 bps end-September 2017 and from 74 bps end-December 2016. Financial CP increased to 143 bps end-December 2017 from 118 bps end-September 2017 and also rose from 87 bps end-December 2016."
Finally, the update addresses, "Total Money Market Instruments Outstanding," saying, "Preliminary outstanding volume of commercial paper stood at $965.9 billion at the end of the fourth quarter, down 1.7 percent from the prior quarter’s $982.4 billion and an increase of 9.2 percent y-o-y."
In other news, Wells Fargo Asset Management writes about SFIG, regulations and LIBOR in its latest "Portfolio Manager Commentary." The piece, entitled, "Viva Las Vegas!," says, "The Structured Finance Industry Group held its 2018 conference in Las Vegas from February 25–28. [W]ith well over 7,000 attendees the event remains the largest structured finance conference in the world, drawing professionals from rating agencies, issuers, dealers, the investing and legal communities, and other participants in the structured finance marketplace. The optimism on display at last year’s conference largely carried over to the conference this year, given the continued strong credit and market environments. In addition to conversations about credit, themes from this year’s conference included the impacts of easing regulation, tax reform, and benchmark, as well as the continued maturation of less-established securitized asset classes."
Wells explains, "In the commercial paper market, as of February 28, the amount of asset-backed commercial paper (ABCP) outstanding as tracked weekly by the Federal Reserve (Fed) currently stands at $240.5 billion, versus $246.9 billion a year ago (not seasonally adjusted). Looking forward, expected 2018 volume for U.S. ABS, excluding CLOs and CMBS, appears to be similar to, if not slightly lower than, 2017, with continued shifts in composition as asset classes other than credit cards and autos become a larger portion of the mix. However, higher-than-expected increases in rates may slightly pressure forecasted volumes and credit. The ABCP market remains well anchored with liquidity from large, internationally active banks funding assets such as trade receivables or assets ultimately placed in the term ABS market."
In a brief "Regulatory update," the piece tells us, "Issuers and investors largely have implemented many of the crisis-driven regulatory changes addressing capital, liquidity, and securitization standards, including some still in the pipeline, and they now may be able to shift their focus as they enter an environment that seems to be marked by an easing of some of those very same regulations. Congress, the U.S. Department of the Treasury, and the Fed have multiple work-streams to modify banking and capital market regulations, and additional changes may come from other sources, such as the courts. For example, the recent decision by the U.S. Court of Appeals to exempt CLO managers from Dodd-Frank’s risk-retention requirements was viewed as a positive for the business and may spur other sectors to seek relief, although it is not clear how issuance volume may be affected in other sectors to the extent relief does not occur.
Wells Fargo Funds adds, "Benchmark reform also was a topic of conversation. Replacing the London Interbank Offered Rate (LIBOR) with a new benchmark presents a sizable task on a number of different fronts. Participants were particularly focused on ensuring that the economics of legacy transactions are not skewed to benefit one party, at the expense of another, upon transition to the new index. Presently, it is a challenge to compare the current benchmark with the proposed, and adding to the difficulty in this analysis is the fact that there is no curve yet available for a proposed benchmark…. As the 2021 implementation date nears, these and other tasks create a sense that the market has significant milestones to reach before a change is possible. Some issuers even stated that they believe the implementation could be delayed as a result of the complexity of building a replacement benchmark out the curve. It may be a bumpy path."
The update continues, "Speculation on the impacts of tax reform signed into law in December 2017 was a frequent discussion. Corporations still appear to be evaluating both how their business operations may change and what changes might take place with their investment portfolios. While much speculation abounds on where flows may migrate, the consensus was that it may be too soon to draw concrete conclusions on how the investing space might be altered."
Finally, Wells writes, "After spending last year getting acclimated to a Fed hiking cycle, the money markets have handled February's supply surge relatively smoothly, with investors welcoming the higher yields. Other financial markets, nearly without exception, have seen a marked increase in volatility as they grapple with newly awakened market forces. Crisis management had been the name of the game for nearly a decade, and as central banks step back and fiscal authorities ease some restrictions, it seems as though markets may be free to chart their own messy course. As for the Fed, so far its new voices sound like its old ones. Its normalization path seems set, with a systematic balance sheet wind-down underway combined with quarterly rate hikes, but the combination of a new cast of characters, not only in the leadership but also throughout the board and regional districts, with a robust economy and a pulsing new fiscal policy makes the monetary policy path uncertain."
