296 posts on "Financial Markets"
February 8, 2023
Is There a Bitcoin–Macro Disconnect?
Cryptocurrencies’ market capitalization has grown rapidly in recent years. This blog post analyzes the role of macro factors as possible drivers of cryptocurrency prices. We take a high-frequency perspective, and we focus on Bitcoin since its market capitalization dwarfs that of all other cryptocurrencies combined. The key finding is that, unlike other asset classes, Bitcoin has not responded significantly to U.S. macro and monetary policy news. This disconnect is puzzling, as unexpected changes in discount rates should, in principle, affect the price of Bitcoin.
February 6, 2023
Understanding the “Inconvenience” of U.S. Treasury Bonds
Editor’s note: Since this post was first published, a reference in the second paragraph to primary dealers switching positions was corrected to read "a net-short to a net-long position." February 6, 10:37 a.m.
The U.S. Treasury market is one of the most liquid financial markets in the world, and Treasury bonds have long been considered a safe haven for global investors. It is often believed that Treasury bonds earn a “convenience yield,” in the sense that investors are willing to accept a lower yield on them compared to other investments with the same cash flows owing to Treasury bonds’ safety and liquidity. However, since the global financial crisis (GFC), long-maturity U.S. Treasury bonds have traded at a yield consistently above the interest rate swap rate of the same maturity. The emergence of the “negative swap spread” appears to suggest that Treasury bonds are “inconvenient,” at least relative to interest rate swaps. This post dives into this Treasury “inconvenience” premium and highlights the role of dealers’ balance sheet constraints in explaining it.
Posted at 7:00 am in Financial Intermediation, Financial Markets, Treasury | Permalink | Comments (4)
January 11, 2023
Foreign Banking Organizations in the United States and the Price of Dollar Liquidity
Foreign banking organizations (FBOs) in the United States play an important role in setting the price of short-term dollar liquidity. In this post, based on remarks given at the 2022 Jackson Hole Economic Policy Symposium, we highlight FBOs’ activities in money markets and discuss how the availability of reserve balances affects these activities. Understanding the dynamics of FBOs’ business models and their balance sheet constraints helps us monitor the evolution of liquidity conditions during quantitative easing (QE) and tightening (QT) cycles.
Posted at 7:00 am in Banks, Central Bank, Financial Intermediation, Financial Markets, Liquidity | Permalink | Comments (1)
December 21, 2022
Can Decentralized Finance Provide More Protection for Crypto Investors?
Several centralized crypto entities failed in 2022, resulting in the cascading failure of other crypto firms and raising questions about the protection of crypto investors. While the total amount invested in the crypto sector remains small in the United States, more than 10 percent of all Americans are invested in cryptocurrencies. In this post, we examine whether migrating crypto activities from centralized platforms to decentralized finance (DeFi) protocols might afford investors better protection, especially in the absence of regulatory changes. We argue that while DeFi provides some benefits for investors, it also introduces new risks and so more work is needed to make it a viable option for mainstream investors.
November 30, 2022
How Is the Corporate Bond Market Functioning as Interest Rates Increase?
The Federal Open Market Committee (FOMC) has increased the target interest rate by 3.75 percentage points since March 17, 2022. In this post we examine how corporate bond market functioning has evolved along with the changes in monetary policy through the lens of the U.S. Corporate Bond Market Distress Index (CMDI). We compare this evolution to the 2015 tightening cycle for context on how bond market conditions have evolved as rates increase. The overall CMDI has deteriorated but remains close to historical medians. The investment-grade CMDI index has deteriorated more than the high-yield, driven by low levels of primary market issuance.
November 15, 2022
How Liquid Has the Treasury Market Been in 2022?
Policymakers and market participants are closely watching liquidity conditions in the U.S. Treasury securities market. Such conditions matter because liquidity is crucial to the many important uses of Treasury securities in financial markets. But just how liquid has the market been and how unusual is the liquidity given the higher-than-usual volatility? In this post, we assess the recent evolution of Treasury market liquidity and its relationship with price volatility and find that while the market has been less liquid in 2022, it has not been unusually illiquid after accounting for the high level of volatility.
November 7, 2022
What Is Atomic Settlement?
Distributed ledger technologies (DLTs) have garnered growing interest in recent years and are making inroads into traditional finance. One purported benefit of DLTs is their ability to bring about “atomic” settlement. Indeed, several recent private sector projects (SDX, Fnality, HQLAx) aim to do just that. But what exactly is atomic settlement? In this post, we explain that atomic settlement, as it is often defined, combines two distinct properties: instant settlement and simultaneous settlement, which should be kept separate.
October 5, 2022
Measuring the Ampleness of Reserves
Over the past fifteen years, reserves in the banking system have grown from tens of billions of dollars to several trillion dollars. This extraordinary rise poses a natural question: Are the rates paid in the market for reserves still sensitive to changes in the quantity of reserves when aggregate reserve holdings are so large? In today’s post, we answer this question by estimating the slope of the reserve demand curve from 2010 to 2022, when reserves ranged from $1 trillion to $4 trillion.
Posted at 7:00 am in Banks, Central Bank, Federal Reserve, Financial Institutions, Financial Markets, Monetary Policy | Permalink
September 28, 2022
Short‑Dated Term Premia and the Level of Inflation
Since the advent of derivatives trading on short-term interest rates in the 1980s, financial commentators have often interpreted market prices as directly reflecting the expected path of future interest rates. However, market prices generally embed risk premia (or “term premia” in reference to measures of risk premia over different horizons) reflecting the compensation required to bear the risk of the asset. When term premia are large in magnitude, derivatives prices may differ substantially from investor expectations of future rates. In this post, we assess whether term premia have increased with the recent rise in inflation, given the historically positive relationship between the two series, and what this means for the interpretation of derivatives prices.
September 8, 2022
How Can Safe Asset Markets Be Fragile?
The market for U.S. Treasury securities experienced extreme stress in March 2020, when prices dropped precipitously (yields spiked) over a period of about two weeks. This was highly unusual, as Treasury prices typically increase during times of stress. Using a theoretical model, we show that markets for safe assets can be fragile due to strategic interactions among investors who hold Treasury securities for their liquidity characteristics. Worried about having to sell at potentially worse prices in the future, such investors may sell preemptively, leading to self-fulfilling “market runs” that are similar to traditional bank runs in some respects.
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