Why is the NY Fed pumping billions into the money market?

NEW YORK, United States - For the first time in more than a decade, the US central bank this week stepped into financial markets to keep interest rates on short-term lending from popping above its target range.

The New York Federal Reserve Bank conducted money market interventions on Tuesday and Wednesday and planned another for Thursday morning, as a cash crunch drove up the cost of borrowing for banks that need to replenish the reserves they hold at the central bank.

What is the money market?

Financial institutions use money markets to borrow for very short periods, from one day to a year, a crucial function to keep the gears of the economy running.

In so-called repurchase or "repo" agreements, banks borrow by putting up assets like Treasury notes as collateral and then repay the loans with interest the following day.

This lets them replenish the cash holdings they keep at the central bank whenever the amount falls below the required minimum set by the Fed.

Money market interest rates typically track closely with the target range that the Fed sets for the federal funds rate, the benchmark lending rate that influences borrowing costs throughout the global economy.

Why did the New York Fed intervene?

Money market rates began to jump on Monday afternoon, hitting as high as 10 percent in some cases, surprising traders.

The reasons behind borrowers' sudden demand for cash were attributed to a host of technical conditions that converged to drain money out of the system.

There were major cash withdrawals as quarterly corporate taxes came due, at the same time as a surge of US Treasury debt came into the market to finance deficit spending by the federal government. 

More generally, more government securities have built up on the balance sheets of private firms these days as the Fed has begun to wind down the massive holdings of Treasury paper it amassed during the global financial crisis -- which has also sucked cash out of the market.

"It looks like a lot of cash left the system in recent days and that demand for dollars was greater than the number of dollars in circulation," said Gregori Volokhine of Meeshaert Financial Services.

To bring rates down, the New York Fed pumped fresh liquidity into the system through repo operations -- $53 billion on Tuesday, $75 billion on Wednesday, with another $75 billion planned for Thursday morning.

Should we be worried?

Investors have wondered whether the sudden jump in rates was a purely technical glitch or a sign of a deeper problem in the financial system.

The event awakened painful memories of the 2008 financial meltdown, when credit markets seized up suddenly as banks feared that borrowers would go bust before repaying.

But after unveiling fresh cut to the benchmark lending rate on Wednesday, US Fed Chairman Jerome Powell told reporters the liquidity crunch was not a concern for the wider economy.

"While these issues are important for market functioning and market participants, they have no implications for the economy or the stance of monetary policy," he said.

Powell noted the tax payments deadline and surge in Treasury debt issues, which temporarily drained cash from the financial system.

"Our sense is that it surprised market participants a lot too," Powell said. "People were writing about this and publishing stories weeks ago. It was a stronger response than we expected."

But he said the New York Fed operations "were effective in relieving funding pressures."

source: news.abs-cbn.com

Asia stocks edge up on optimism over global growth, dollar soft

TOKYO - Asian shares edged up on Monday on optimism for global growth, while the dollar was on the defensive as a subdued US inflation outlook capped US bond yields and raised questions about the Federal Reserve's plans to tighten policy.

European shares are seen opening little changed. Spread-betters expect Britain's FTSE to open 0.1 percent higher and Germany's DAX and France's CAC to start almost flat.

MSCI's broadest index of Asia-Pacific shares outside Japan ticked up 0.4 percent as tech counters led gains in Korean and Taiwanese shares to record highs and 27-year highs respectively. [

Trading was slow with many markets in the region closed for holidays to celebrate the end of Ramadan.

Japan's Nikkei rose 0.1 percent.

Mainland Chinese shares rallied, with the CSI300 index rising 1.2 percent to hit its highest level in almost a year and a half, after the MSCI chief said the index provider could raise its weighting of China's mainland-listed 'A' shares.

The prospect of solid global economic growth has kept alive investor optimism for world equities even as some markets, including Wall Street, have slowed from a meteoric run because of high valuations.

Share prices have also been supported by relatively loose monetary policies in the developed world, with the Bank of Japan and the European Central Bank still pumping in funds.

The US Federal Reserve is gradually tightening its policy, but investors think the pace of its tightening will be much slower than policymakers want, given subdued US inflation.

Money market futures price in only about 50 percent chance of another rate hike by the end of the year, compared to Fed's own projection of one more rate increase.

That hardly changed after San Francisco Fed President John Williams said the US central bank needs to keep raising rates gradually with the US economy at full employment and inflation set to hit the Fed's two-percent target next year.

The 10-year US Treasuries yield stood at 2.153 percent, not far from seven-month low of 2.103 percent hit mid-June, after news that inflation had undershot expectations for a third straight month.

The 30-year yield hit 7-1/2-month low of 2.710 percent on Friday, making the yield curve the flattest in almost a decade. It last stood at 2.722 percent.

The lower yields have put the dollar on the defensive, though some market players say both Treasury yields and the dollar could rise if US President Donald Trump manages to push his healthcare bill through Congress.

"There will be renewed focus on US healthcare bill. Its passage in the parliament could lead to expectations that the administration will get down to stimulus next," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

Republican Senate leader Mitch McConnell has pushed for a vote on the bill before the July 4th Independence Day holiday recess that begins at the end of this week.

Yet he can afford to lose the support of only two Republicans in the face of unanimous Democratic opposition, while five Republican senators have said they will not support the bill in its current form.

The dollar stood at 111.29 yen, off last week's high of 111.79.

The euro traded at $1.1194, slowly recovering from its three-week low of $1.1119 touched on Tuesday.

A strong reading in Germany's Ifo business sentiment survey due at 0800 GMT (4 p.m. in Manila) could open the way for a test of $1.1296, its seven-month high hit earlier this month.

The euro was little damaged by the news that Italy began winding up two failed regional banks on Sunday in a deal that could cost the state up to 17 billion euros ($19 billion).

"This won't cause a major financial crisis considering the current strength of the euro zone economy," said Yukio Ishizuki, senior strategist at Daiwa Securities.

Oil prices ticked up after having fallen for five weeks in a row on concerns OPEC-led production cuts have failed to ease a global crude glut stemming in part from increased US oil production.

US energy firms added 11 oil rigs in the week to June 23, bringing the total count up to 758, the most since April 2014, according to data from energy services firm Baker Hughes Inc.

Brent crude futures rose 1.1 percent to $46.02 per barrel from seven month lows of $44.35 hit last week.

US West Texas Intermediate (WTI) crude futures fetched $43.47 per barrel, up 1.1 percent on the day and extending gains from their 10-month low of $42.05 set on Wednesday.

"There is some support near $40 in the WTI. People think that U.S. shale development will stop if it falls below $40," said Tatsufumi Okoshi, senior economist at Nomura Securities.

source: news.abs-cbn.com

Asian shares hit 3-week high ahead of crunch Fed meeting

TOKYO - Asian stocks hit a three-week high on Thursday after a jump in oil prices lifted Wall Street, with many investors taking last-minute positions ahead of a crucial U.S. Federal Reserve policy announcement.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4 percent, hitting its highest level in three weeks while Japan's Nikkei average rose 1.4 percent.

Oil prices jumped on Wednesday, after the largest U.S. crude drawdown in seven months at the key U.S. delivery point eased worries about over supply, helping to boost battered energy stocks.

That in turn supported Wall Street shares, with S&P 500 index rising 0.9 percent to 1,995.31, its highest close in almost a month, having pared just about a half of its fall from July to late August.

U.S inflation data, unveiled a day before the Fed's long-awaited policy decision later in the day, showed consumer prices unexpectedly fell in August.

Precious metal prices jumped as some market players took low the inflation reading to mean a smaller chance of an immediate rate hike.

Gold prices XAU= rose to 1.3 percent on Wednesday to $1,119.50 per ounce. Silver XAG= jumped 3.9 percent to $14.96 per ounce, its highest level in more than three weeks.

The dollar also lost its edge in the currency market after the data, with the currency's index against a basket of six major currencies .DXY slipping to 95.323 from this week's high of 95.845.

"We believe that the Fed will refrain from raising rates today. But at the same time, it will indicate that it is highly likely to raise rates by the end of the year," said Tomoaki Shishido, fixed income analyst at Nomura Securities.

But there is little clarity on what the Federal Reserve will do on the whole.

U.S. money market futures hardly moved, still pricing in about one-in-four chance of a rate hike on Thursday.

On the other hand, the U.S. two-year note yield hit a 4 1/2-year high of 0.819 percent as investors expect the Fed will start its tightening cycle soon as the economy recovers, even if it does not do so this month.

The rise in Treasuries yields, also likely reflected selling by China, which needs to cash out dollars for its intervention to support the yuan, market players said.

The data published late on Wednesday showed China's holding of U.S. Treasuries dropped to $1.241 trillion in July from $1.271 in June.

source: www.abs-cbnnews.com

What to do with your money when interest rates rise

MANILA, Philippines - If there is one thing that investors and market analysts around the world watch closely, it is the movement of interest rates.

Last year, following an improvement in the US economy, the US Federal Reserve announced that it would cut its bond buying program. This signaled that interest rates would begin to rise. That announcement set off a series of events including foreign investors pulling out their funds from the Philippines and other emerging markets, the local stock market dropping, and the exchange rate rising to the P45 level against the US dollar. For the Philippines, where interest rates have been at record lows, this created fears that rising interest rates would affect investment and consumer spending.

Most investment houses forecast that in 2014, interest rates would be kept low by authorities in order to aid reconstruction efforts, especially after the damage caused by Typhoon Yolanda, and in order to keep consumer spending going. Just the same, market analysts also say that a spike in interest rates is imminent within the year.

With the prospect of an interest rate hike, one of the questions most frequently asked by people is what to do with their money.

The answer to this is it depends on your current portfolio.

Rising interest rates have their upsides and downsides. On the down side, they could mean higher interest rates on your loans. If you have debt, you may find yourself having to pay more interest rates. On the upside, higher interest rates can mean better yields on some investment instruments you may be holding. What you would do would therefore depend on what your current portfolio looks like, as well as your investment goal.

If you are holding debt with floating interest rates, and you happen to have cash, you may consider paying it off, for instance.

If you are holding equities, you may consider shifting to higher-interest yielding instruments. If you are holding a savings account or cash deposits, then you can just stay put.

An uptick in interest rates is often seen as a signal to move to safer investment havens, such as fixed income instruments.

Fixed income instruments, as the name suggests, provide preset periodic returns. The rates are known by the investor from the beginning and the principal is returned at maturity. Examples of fixed income instruments are government securities, bonds, and certificates of deposit. All are debt instruments, wherein the issuer pays back the investor with the fixed interest rate on a set date. The date that the loan is to be repaid is called the maturity date. Take a 10-year treasury bill with a fixed rate of 3% per annum. An investment of P1,000 would mean a P30 payment until maturity, which is when the P1,000 will be returned to the investor.

When interest rates rise, a simple rule to follow is to head for safety.

The safest haven, of course, is cash, followed by fixed income instruments that have short maturities. This is because the relationship between interest rates and the value of investment instruments is inversely proportional. In other words, when interest rates rise, the value of the instrument falls.

It is important to note that all instruments carry a measure of risk. One measure of risk is the amount of time that you will be holding on to the instrument. The longer an instrument reaches maturity, the higher the risk it carries, for obvious reasons: it is very hard to imagine the risks that may suddenly arise in the future. For instance, there might be a catastrophe that may affect the ability of the issuer to pay off his debt. In contrast, risks in the immediate horizon are easier to predict. Because of this measure of unpredictability, prices of instruments with longer tenors are higher. The 25-year treasury bill, for example, has a higher price than the 10-year T-bill.

As interest rates rise, most prefer to go for instruments with the shortest possible duration. Instruments with durations below one year are generally considered short-term. This allows an investor to simply roll over his or her money at the end of the term, or pull out your money without paying penalties if there is a sudden change in the rates that may warrant a shift to another instrument.

Short-term instruments are traded in the money market. Money markets offer investors two important elements: safety of capital and liquidity. Although they do not offer much in terms of yield, you are assured of getting back your capital within a short period.

Since most fixed term instruments (certificates of deposit, commercial papers, and treasury bills) are purchased and traded by financial institutions in the secondary markets, the best way for retail investors to access these is through unitary investment trust funds (UITFs) or mutual funds. These provide an alternative way to invest in these instruments and may be availed of at an affordable initial investment, usually ranging from P5,000 to P10,000. UITFs are available from financial institutions such as banks and insurance firms. UITFs also allow you to diversify your portfolio and lessen your risks.

Before you make any shift in your holdings, remember that diversification is the key to balancing your risks and wealth objectives. In determining which UITF to avail of, keep your investment goal in mind. Do you want capital safety or growth? Your choice of UITF should be based on your goal, as well as your risk appetite and financial standing. If you are not sure what to do, it is always a good habit to seek the advice of a trusted professional to guide you in managing your investment portfolio.

source: www.abs-cbnnews.com