America Went on a Borrowing Binge, but Banks Were Left Out



Large U.S. lenders saw their loan books shrink in 2020 for the first time in more than a decade, according to an analysis of Federal Reserve data by Jason Goldberg, a banking analyst at Barclays. The 0.5% drop was just the second decline in 28 years.

Bank of America Corp.’s loans and leases dropped by 5.7%. Citigroup Inc.’s loans dropped by 3.4% and Wells Fargo & Co.’s shrank by 7.8%. Among the biggest four banks, only JPMorgan Chase & Co. had more loans at the end of the year than the start.

Lenders are flush with cash that they want to put to use, and executives say they are hopeful loan growth will pick up in 2021. Brisk lending typically suggests there is enough momentum in the economy to give companies and consumers the confidence to borrow. But the current weakness suggests questions remain about the vigor of the economic recovery.

Author(s): Ben Eisen

Publication Date: 10 February 2021

Publication Site: WSJ

Most U.S. Treasury Yields Close Lower



Yields on most U.S. government bonds fell Monday, showing further signs of stabilizing after soaring to multi-month highs last week.

The yield on the benchmark 10-year Treasury note settled at 1.444%, according to Tradeweb, down from 1.459% Friday.

Shorter-dated yields also headed lower, in a reversal from last week when investors bet that the Federal Reserve will start raising interest rates earlier than previously anticipated in response to an expected burst of economic growth and inflation.

The five-year yield settled at 0.708%, from 0.775% Friday. Yields fall when bond prices rise.

Author(s): Sebastian Pellejero and Sam Goldfarb

Publication Date: 1 March 2021

Publication Site: Wall Street Journal

Bond-Market Tumult Puts ‘Lower for Longer’ in the Crosshairs



A wave of selling during the past two weeks drove the yield on the benchmark 10-year Treasury note, which helps set borrowing costs on everything from corporate debt to mortgages, to above 1.5%, its highest level since the pandemic began and up from 0.7% in October.


Traders said concerning dynamics were evident in a Treasury auction late last week. Demand for five- and seven-year Treasurys was weak Thursday heading into a $62 billion auction of seven-year notes and nearly evaporated in the minutes following the auction, which was one of the most poorly received that analysts could remember.

The seven-year note was sold at a 1.195% yield, or 0.043 percentage point higher than traders had expected — a record gap for a seven-year note auction, according to Jefferies LLC analysts. Primary dealers, large financial firms that can trade directly with the Fed and are required to bid at auctions, were left with about 40% of the new notes, about twice the recent average.

Author(s): Julia-Ambra Verlaine, Sam Goldfarb

Publication Date: 28 February 2021

Publication Site: Wall Street Journal

Monetary policy and the corporate bond market: How important is the Fed information effect?



Does expansionary monetary policy drive up prices of risky assets? Or, do investors interpret monetary policy easing as a signal that economic fundamentals are weaker than they previously believed, prompting riskier asset prices to fall? We test these competing hypotheses within the U.S. corporate bond market and find evidence strongly in favor of the second explanation—known as the “Fed information effect”. Following an unanticipated monetary policy tightening (easing), returns on corporate bonds with higher credit risk outperform (underperform). We conclude that monetary policy surprises are predominantly interpreted by market participants as signaling information about the state of the economy.


PDF: Full Paper

Author(s): Michael Smolyansky and Gustavo Suarez

Publication Date: 16 February 2021

Publication Site: Federal Reserve Board

Federal Reserve Financial-Services Systems Disrupted for Hour



One of the services taken offline was the Fedwire Funds Service, which the Fed describes as “the premier electronic funds-transfer service that banks, businesses and government agencies rely on for mission-critical, same-day transactions.” Entities use the service to send or receive payments, settle positions with other financial institutions and to submit tax payments, among other activities.

Also affected were FedACH, an automated clearinghouse network that enables debit and credit transactions, and Fedwire Securities, which provides transfer and settlement services for securities issued by the U.S. Treasury, government agencies and government-sponsored housing enterprises.

The first service to be restored — at 2:17 p.m. ET — was the Fed’s central bank programs, which include setting interest rates and allowing financial institutions to review and manage the money they hold at the Fed, called reserves. Fedwire and FedACH were back shortly before 3 p.m.

Author(s): Paul Kiernan and Orla McCaffrey

Publication Date: 24 February 2021

Publication Site: Wall Street Journal

Fed Chairman Vows to Keep Supporting Economic Recovery



The Fed will continue $120 billion in monthly bond purchases and communicate any change.

Powell doesn’t expect any large and persistent increases in inflation; some pickup will be temporary.

Powell says getting the pandemic under control is needed for the economy to reopen.

Author(s): Bernice Napach

Publication Date: 23 February 2021

Publication Site: Think Advisor

So … Is Bitcoin Going to Replace the Dollar?



Bitcoin has been on a roll lately, rising in price five-fold over the past 12 months. Meanwhile, the US dollar, the world’s reserve currency, has lost 9% of its value.

All this has buoyed talk that someday Bitcoin in particular, or cryptocurrency in general, will replace the buck. Well, forget about that, argues St. Louis Federal Reserve President James Bullard, invoking the lessons of pre-Civil War days to warn about the chaos brought by a world of nonuniform currencies—that would be one where the buck isn’t king. 

Appearing on CNBC Wednesday, he predicted that “it’s going to be a dollar economy as far as the eye can see—a dollar global economy really as far as the eye can see—and whether the gold price goes up or down, or the Bitcoin price goes up or down, doesn’t really affect that.”

Author(s): Larry Light

Publication Date: 18 February 2021

Publication Site: ai-CIO

The Reddit Inspired Attack on Shorts Exposed Wall Street Sleaze and Corruption



The big players are overleveraged because the Fed encouraged them. The whole thing is propped up by stimulus and bailouts of consumers and companies alike.

This coordinated short squeeze pushed two hedge funds and Robinhood to the brink. It revealed for all to see how broken the stock market has been..

You know it’s serious when the New York Times puts a stock chart at the top of the page in a Saturday morning edition.

Traders who follow prudent strategies are ridiculed and have zero returns. The Fed is the biggest manipulator out there.

Those traders on Reddit have succeeded in showing how completely broken the stock market is.

The Fed is a big proponent of this through its monetary policy for the wealth effect. It is responsible for reckless leverage, crazy trading strategies, and the huge incentive to manipulate.

Author(s): Mish

Publication Date: 1 February 2021

Publication Site: Mish Talk Global Economics Trend Analysis

Deficits Don’t Matter—Until They Do



The big misunderstanding here is that, though structural changes are certainly persistent and less responsive to policy, they are not permanent. Conditions are always changing. Productivity transforms economies, and so do shifting age structures and demographics. Foreigners are already losing their appetite for U.S. debt; much of it is now bought by the Fed or by banks required to hold it for regulatory reasons. Thus prices may not be as revealing as we think.

And we can’t be sure that debt monetization won’t unleash inflation or higher interest rates. The Fed buys bonds from the banks and credits them with reserves. Eventually banks may want to spend their reserves, and the Fed will need to sell some bonds—which could increase interest rates, or increase inflation, or both. The world could also discover a new safe asset, like German stocks. For many years, gold was considered the only safe asset, and it was unimaginable that a fiat currency could be safe.

Structural changes happen more often and much faster than people realize. We could come out of the pandemic in a new regime of less trade and more reliance on tech that could change debt and price dynamics in ways that we don’t yet understand.

Author(s): Allison Schrager

Publication Date: 12 February 2021

Publication Site: City Journal

In Search of the New Debt Consensus




When economists like Larry Summers and Olivier Blanchard, who normally support more spending, balked at the size of the Biden stimulus plan, supporters of the plan said there was no reason to worry. Clearly markets are not worried about inflation or sustainable debt, just look at low bond prices and modest inflation expectations.  They argue if markets aren’t worried, maybe none of us should be. 

But we are in uncharted territory. The Debt-to-GDP ratio grew exponentially last year to once unthinkable levels, at least for a time of without a major military conflict.1 Piling on another $1.9 trillion (and possibly more later this year) risks higher rates in the future. The more leverage you carry, the less room you have to spend on the next disaster. 

So why aren’t markets more worried? Perhaps because for the time being there are not better, safer alternatives.  Also, the government has a captive buyer of its debt in the Federal Reserve, whose holdings of US government debt also reached unprecedented levels last year. Debt enthusiasts dismiss worries of an overheating economy by pointing out the Fed could raise rates and stop inflation if it takes off. But that would involve the Fed selling some of its debt and putting even more bonds on the markets, only this time there won’t be a single captive buyer. 

Author(s): Allison Schrager

Publication Date: 10 February 2021

Publication Site: E21

Junk Has Never Been So Valued



If you’re an over-leveraged company at risk of default, now’s your moment to load up on more debt. The average yield on U.S. junk bonds dropped below 4% for the first time on Monday amid a market scavenger hunt for higher returns.

The Federal Reserve has pushed down long-term interest rates by buying bonds and committed to keep short-term interest rates at near zero through 2023. While the central bank’s interventions were needed in March, it continued to buy corporate bonds well into the summer when markets didn’t need the support.

Author(s): WSJ Editorial Board

Publication Date: 9 February 2021

Publication Site: Wall Street Journal

How the Federal Reserve’s Actions and Low Interest Rates Impact Public and Private Retirement Savings



The extended period of low interest rates we’re in is not only creating challenges for public pension systems across the nation, but it is also negatively impacting people who are relying on their own savings to fund their retirements.

A common strategy for generating retirement income is to invest savings from an individual retirement account (IRA) or 401(k) into income-producing assets such as corporate bonds. But interest rates on corporate bonds have been falling in recent decades, reaching multi-decade lows in 2020.

Author(s): Marc Joffe

Publication Date: 20 January 2021

Publication Site: Reason