Saturday, May 23, 2015

Thursday, May 21 GAFI Recap: FOMCs $80b Term Offering, Mortgage Contract Design, Atl's Gray Financial Grp, & The Euro-bond Sell Off Opportunity

The FOMC conducted an $80 billion floating-rate offering on a 14-day term for IOER+.01%
The Fed published the opening remarks at a mortgage contract design conference
The SEC announced charges against Atlanta-based Gray Financial Group
An OFR paper suggests Europe is a hot investment due to QE

  • On May 21, 2015, the FOMC conducted a floating-rate offering of 14-day term deposits with a rate equal to the interest rate paid on excess reserves (IOER) plus 1 bps (IOER +.01%). The offering awarded $80 billion and had 53 participants. The "award" will settle on May 21, and mature on June 4. This is why the fed funds rate dropped a bps point, from .13% to .12% on May 19, one day after the Fed announced the offering, which suggests that while increasing the IOER acts like a magnate to pull interest rates up, term deposits at a rate of IOER + .01% can have the opposite effect. Expect to see this policy tool used frequently in the coming years as the Fed looks for ways to control rates.
  • The Federal Reserve published the opening remarks at the Mortgage Contract Design: Implications for Households, Monetary Policy, and Financial Stability Conference. The remarks were given by James McAndrews, Executive Vice President and Director of Research at the Federal Reserve Bank of New York. The conference is sponsored along with the NYU Stern Center for Real Estate Finance Research. I won't go into the details of this report as I will be providing a full write up due to its significance, but I can say that the speech provides a great deal of insight into the true nature of what drives interest rate design in the mortgage debt market, and therefore the securities that back it. This is a must read. 
  • The SEC announced charges against an Atlanta-based Gray Financial Group, its founder and president Laurence O. Gray, and co-CEO Robert C. Hubbard IV for "selling unsuitable investments to pension funds for the city’s police and firefighters, transit workers, and other employees." To be clear, these are stewards of public pension funds. Evidently, "Georgia law allows most public pension funds in the state to purchase alternative investment funds," the announcements states, "but the investments are subject to certain restrictions that Gray Financial Group’s fund allegedly failed to meet."  The order accuses the group of collecting over $1.7M from investors. Not only did the Group breach their fiduciary duty to the investor, but they profited from the breach of service. Expect heavy penalties if convicted.
  • The OFR published an interesting paper suggesting that Europe is a good place to put you monetary over the next QE season. "Over the last month, long-term euro area bonds experienced a sharp sell-off, leading to outsized moves in other major global bonds, including U.S. Treasuries," the write up states, adding that the, "sell-off reflects a partial unwinding of the euro area “QE trade,” in which investors established sizable positions in euro area bonds, equities, and the euro in response to the European Central Bank’s expanded asset-purchase program." In other words, asset prices went up in the US largely due to QE over the last 5 years, and now that Europe is about to embark on the same journey, the same will happen to euro area bonds and equities, most especially the euro itself. I see this unwinding as opportunity. Expect a new portfolio coming out focusing on euro area equities.