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Article this morning from @Birdyword brings light to the funding markets/plumbing heading in another YE funding cycle.
Some quick thoughts 1/n https://www.wsj.com/articles/shrinking-money-market-funds-threaten-global-dollar-supply-11599818495
Some quick thoughts 1/n https://www.wsj.com/articles/shrinking-money-market-funds-threaten-global-dollar-supply-11599818495
The article highlights that closures/outflows of prime MMF's jeopardizes a major funding source for non US banks. Its important to not that prime assets peaked in 08'; dropped 75% after MMF reform, and have significantly cut fin CP since March. 2/n
If we measure funding pressure in terms of LOIS (decent enough proxy given fin CP weight in LIBOR), we'll see crisis pressure in 08' and 20' and technical pressure in 16' following MMF reform and 18' offshore tax policy changes. 3/n
One evolving facet not mentioned in the article is that much of the prime money is being channeled towards SMAs which do not have the same liquidity regs as 40 act MMFs. A technical widening event is possible but unlikely to be a serious concern IMO. 4/n
Article cites "funding oracle" Zoltan Pozsar's concerns over GSIB banks jumping up a GSIB bucket during 2020. This is A. very normal and B. to be expected as dealers FICC desks leaned against the covid crisis. This is a replay of 19' where YE cleared at the Fed's repo pxing 5/n
Lastly, wrt cxy basis - the Fed's central bank swap lines remain in effect through next March. We'll get an early peak at the turn in a few weeks but suffice it to say, barring an major remediation concerns, this is shaping up to be a snoozer. 6/n
Hoping mostly to add context here. While I think the article is a bit overly bearish on the situation, I always love seeing light being shed on an otherwise very opaque corner of financial markets. Thanks @Birdyword for writing.
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