302 posts on "Financial Markets"
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.
July 14, 2022
The Bond Market Selloff in Historical Perspective
Treasury yields have risen sharply in recent months. The yield on the most recently issued ten-year note, for example, rose from 1.73 percent on March 4 to 3.48 percent on June 14, reaching its highest level since April 2011. Increasing yields result in realized or mark-to-market losses for fixed-income investors. In this post, we put these losses in historical perspective and investigate whether longer-term yield changes are better explained by expectations of higher short-term rates or by investors demanding greater compensation for holding Treasury securities.
Posted at 7:00 am in Financial Institutions, Financial Markets, Inflation | Permalink | Comments (1)
July 12, 2022
The Global Dash for Cash in March 2020
The economic disruptions associated with the COVID-19 pandemic sparked a global dash-for-cash as investors sold securities rapidly. This selling pressure occurred across advanced sovereign bond markets and caused a deterioration in market functioning, leading to a number of central bank actions. In this post, we highlight results from a recent paper in which we show that these disruptions occurred disproportionately in the U.S. Treasury market and offer explanations for why investors’ selling pressures were more pronounced and broad-based in this market than in other sovereign bond markets.
July 5, 2022
The Fed’s Inaugural Conference on the International Roles of the U.S. Dollar
The U.S. dollar has played a preeminent role in the global economy since the second World War. It is used as a reserve currency and the currency of denomination for a large fraction of global trade and financial transactions. The status of the U.S. dollar engenders important considerations for the effectiveness of U.S. policy instruments and the functioning of global financial markets. These considerations include understanding potential factors that may alter the dominance of the U.S. dollar in the future, such as changes in the macroeconomic and policy environments or the development of new technologies and payment systems.
Posted at 8:02 am in Financial Intermediation, Financial Markets, International Economics | Permalink | Comments (2)
The U.S. Dollar’s Global Roles: Revisiting Where Things Stand
Will developments in technology, geopolitics, and the financial market reduce the dollar’s important roles in the global economy? This post updates prior commentary [here, here, and here], with insights about whether recent developments, such as the pandemic and the sanctions on Russia, might change the roles of the dollar. Our view is that the evidence so far points to the U.S. dollar maintaining its importance internationally. A companion post reports on the Inaugural Conference on the International Roles of the U.S. Dollar jointly organized by the Federal Reserve Board and Federal Reserve Bank of New York and held on June 16-17.
Posted at 8:00 am in Financial Intermediation, Financial Markets, International Economics | Permalink
RSS Feed
Follow Liberty Street Economics
