Chiaverini and Wittkop, Business Insider, New rules are causing an big change in Libor, here.
The most noticeable effect of the upcoming reform is that assets in institutional prime money market funds, which invest in credit securities, have declined dramatically. Since last October, such assets have decreased by $310 billion (a drop of about 32%), with about 40% of that occurring during the last two months, according to data from the Investment Company Institute. Another $200 billion will likely be withdrawn by the time money market reform takes effect in October, based on industry estimates, leaving prime funds a mere 45% of their post-crisis peak size in 2013.
For investors in short-term markets, monitoring outflows from prime money market funds is essential because the funds have traditionally been among the largest buyers of bank commercial paper (CP) and certificates of deposit (CDs). Prime funds are now buying fewer of these securities as their assets shrink and they shorten their maturity profiles in anticipation of further withdrawals over the next two to three months.
Banks in search of new funding sources
Most large financial institutions have relied on prime funds for cheap wholesale funding since 1971. So the dwindling demand from prime funds is putting upward pressure on bank CP and CD rates. This is most easily observed through the move higher in Libor (the London Interbank Offered Rate), which has increased by more than 16 basis points over the past month. While 0.16% may not seem like much, trillions of dollars of global derivatives, mortgages and bond contracts are tied to the Libor rate, and so higher levels have ramifications across markets.
Banks will now need to find new sources of funding. Some that have relied heavily on wholesale funding will turn to official sources. The Bank of Japan, for example, recently doubled the size of its U.S. dollar funding facility for Japanese banks to ease some pressure from the diminished demand for Japanese bank CP and CDs. Other banks are simply continuing to re-price their CDs at higher rates to draw new entrants into the fold.
William Finbarr Flynn, Bloomberg, Treasury 30-Year Yield Seen Near Zero in Nomura’s Vicious Circle, here. When Rates are down NIM is compressed. You probably want your NIM optimized, all things being equal, no?
The yield on 30-year Treasuries could plunge to almost zero within two years as investors seeking higher income streams shift funds from Japanese government bonds into the U.S., according to the Asian nation’s biggest brokerage.
“Japanese money” will move into the sovereign securities of other major economies as about 900 trillion yen ($8.9 trillion) of JGBs offer negative yields, Toshihiro Uomoto, Nomura Holdings Inc.’s chief credit strategist in Tokyo, wrote in a report on Monday. The decline in global yields will weigh on consumer sentiment, put pressure on banks’ interest income, and may result in more stimulus from central banks, according to Uomoto, ranked as Japan’s top credit analyst by Nikkei Veritas for three of the past four years.
Chad Bray, NYT DealBook, Bank of England Cuts Interest Rate to Historic Low, Citing Economic Pressures, here.
The central bank’s Monetary Policy Committee voted unanimously to lower its benchmark interest rate to 0.25 percent, the lowest level in the bank’s 322 years. The rate had been at 0.5 percent since March 2009.
Mr. Carney also signaled on Thursday that the committee could cut rates further this year, but he ruled out the possibility of negative interest rates. The committee’s next meeting is set for November.
The bank also said that it would introduce a series of additional measures to support the economy, predicting that there would be little growth in the second half of this year and that economic growth would decline sharply next year compared with its earlier forecast for 2017.