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The Structure of the US Treasury Market
In the following interview, seasoned fixed-income portfolio manager Mohsen Fahmi questions this assumption. Fahmi is a veteran multi-asset fund manager with extensive experience managing fixed-income funds, including PIMCO Dynamic Bond, PIMCO GIS Dynamic Bond, and PIMCO Multi-Strategy Alternative Fund. After retiring as a fund manager from PIMCO, one of the world’s largest fixed-income investment firms, he continued to serve on the investment committee, helping set strategy for the firm’s $2 trillion in assets. Previously, Fahmi spent eleven years at Moore Capital Management and held positions at Salomon Brothers, Goldman Sachs, and J.P. Morgan. He currently serves as one of the nine Board of Guardians for the Sarawak Sovereign Wealth Future Fund.
A Safe Haven for Hidden Risks
Perceptions are shifting regarding the US fixed-income market. In September 2019, interest rates on overnight repos unexpectedly spiked, leading the Federal Reserve Bank of New York to inject $75 billion in liquidity. In March 2020, the Covid-19 pandemic triggered a wave of securities selling, prompting the Fed to purchase over $1 trillion in securities. These events have raised concerns about market stability.
Swap Structure
Have interest rate swaps become the modern repos? In the latest essay in the ongoing series on Market Microstructures, I argue that shifts in the liquidity market have fundamentally altered the function of interest rate swaps (IRS) in the global financial system. Today, IRS are used to fill funding gaps and compensate for failures in the repurchase agreement (repo) market.
Rate Transformation
On September 28, 2023, the Bank of England opened permanent liquidity facilities to nonbanking financial entities—such as pension funds, insurers, and investment funds— many of whom have a role in the interest rate swap market. The move is unprecedented. Historically, the Bank of England and other Western central banks have assisted banks in managing their cash outflows by creating facilities catering to liquid assets' usability. Since the introduction of swaps in the 1980s, swap market participants were excluded from liquidity programs, and interest rate swaps were not considered a cash management tool. Why the sudden shift?
Working Capital
The Federal Reserve has provided payment and settlement services for more than a century. But FedNow, the instant payments service rolled out in late June 2023, is the first new Fed payments rail in 50 years. Though payment and settlement are crucial pillars of economic transations and global money flows, systemic disinterest persists regarding these financial pipelines.
Global Payments
The last day of June marked the final printing of the London Inter-Bank Offered Rate (LIBOR)—an average of anticipated interest rates among London banks which has thus far served as the benchmark for short term and off-shore lending around the world. LIBOR dictated the rate for all dollar-denominated loans, determining interest rate swaps and consumer loan rates. LIBOR has been replaced by the Secured Overnight Financing Rate (SOFR), a measure based on real transactions in the US Treasury repurchase market. SOFR is thought to be better than LIBOR because it is based on observable rates rather than anticipated ones.
Making Markets
The Gamestop bubble of 2021—where the value of the company’s stocks increased more than a hundred times over in just a few months—exemplified the rising trend of the meme stock frenzy. The event shed light on the role of retail day traders and market-makers in contemporary equity markets, and it also contributed to the justification for the US Securities and Exchange Committee’s (SEC) recent proposals to regulate market-making businesses.
Best Execution?
Recent years have seen the rise of the meme stock frenzy—a wave of stock purchases driven by social media trends. This tendency culminated with the Gamestop bubble of 2021, in which the value of the company’s stocks increased more than a hundred times over in just a few months. Beyond demonstrating the added risk introduced by meme stocks, the occasion revealed crucial insights regarding the role of retail day traders in the structure of contemporary equity markets.
Inside the Black Box
We live in a period of unparalleled financial complexity, and, as the history of recent decades has demonstrated, unparalleled financial risk. The recurring crises which plague the global economy have brought theorists of systemic instability to the fore. Key among them has been Hyman Minsky, whose framework for understanding financial market fragility takes a cyclical form. In his model, an excessive credit expansion (“displacement”) fuels a speculative bubble (“mania” ) and causes “financial distress,” leading to credit contraction and the bursting of the bubble (“panic” ).