Sept 20…)
____________________________$4.5 trilly quad witch today_______________________________
“Yeah, I said it, and I'll say it again, so sue me.” Jamie Dimon, July 2, 2014
I’ll try to get through this note in 500 (886) words, but it will be a challenge.
Imagine dropping a pebble in a calm pool of water. See the rings emanating outward from its impact. The pebble is Fed Funds. The rings are T bills, T notes and long bonds from which all other debt derivatives and securities are benched. Hold that thought.
In the news
The BOJ held its overnight call rate at 0.25% last night. This is the BOJ’s Fed Funds. if the hiked it would have been dollar negative. Japan overall consumer prices rose 3% vs 3% as expected. However, JGB yields languish at 0.889% (BBG: cob 9/18). It is not a mystery why the BOJ needs to hike, however if they do, USD/JPY goes down. The carry (Yen) shorts would need to cover and sell USD assets (primarily stocks) to unwind and/or meet variation calls.
JGBs go down if the BOJ hikes and JGBs represent about a third of the wealth of the Japanese people. Meanwhile with unsustainably low interest rates, inflation continues to rise. If the BOJ hikes it is bad for their bonds. If they do not hike it is bad for their bonds. This is the BOJ’s dilemma. However, not hiking is worse because they cannot control the market. Therefore, they must hike.
The carry trade was born in the 90s. The carry thesis is obvious. No one will say how big the carry is, but time is money and 34 years is a very long time. The BIS estimates the carry at $15 trillion. DB thinks it’s $20 trillion. The plunge in August was just 1 day, and the first and loudest voice to cry out in pain? Jamie Dimon. I am reminded of how he bullied the Fed into slashing capital regs in July when everyone was saying HQLA levels were too low.
How did we get here?
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