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FED Stealth Tightening
September 22 2016 ​( From TradingView )
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​​​As most of us were concerned by the Federal Reserve story on risk
that they hike rates on September 21, it was some relief by most
​market participants that they didn t. The funny thing about the
FED Economic Projections is that they​ at a time they revised lower
their growth forecast on GDP but increased their projection higher
on the Federal Funds Rate with a low inflation outlook. Puzzling me!​​

But as few of us are aware that new rules from the Securities and
Exchange Commission (SEC) on Money Market Fund​ have already
a tremendous impact on some short term rates.​ The biggest
impact from​ t​hose new rules have been less demand for short
term bank debt to short term US Treasury Bills or Bonds...​

Bank debt rates are based on the London interbank offered rate
​(commonly known as Libor); it is an interbank lending rate and is also
​used as a short-term interest rate benchmark. Libor is a very popular benchmark and used as a reference rate on over $350 trillion securities worldwide. Just try to figure out one basis point change is worth $3.5 billion...

​As shown by the first chart below, Libor rates have been rising more than the US Treasury Bills of same maturity (1month and 3 month showed). Obviously the first rise in December 2015 was the hike from the Federal Reserve but take note the rise from mid-summer 2016...

It it more obvious if we look at the spread between Libor rates ans US Treasury Bills as shown by the second chart below.

​​All that to say that in fact, US official monetary policy yesterday have been unchanged BUT the market pressure coming from regulations is in fact pricing a rate hike anyway!

​​And that pressure on short term rates (banks paper) is happening at a time when the seasonals are turning bearish on the mighy SP500 Index and when we have a tremendous divergence between the growth of St-Louis Monetary Base and the SP500 Index.
(See thid chart below)
​​​​​

Read also: 

SEC Adopts Money Market Fund Reform Rules

​​Libor rise, driven by U.S. money market rules, seen topping near 1.0 percent

LIBOR!


Louis Pasteur
"Chance favors the prepared mind."

FED Stealth Tightening   #Trading #investing #rates #stocks #libor #fed
Libor rate 1 month ( blue )
​Libor rate 3 month ( red )
US Treasury Bill yield 1 month ( magenta )
US Treasury Bill yield 3 month ( purple )​


St-Louis Monetary Base (Billions of $ - Blue Line - Left Axis)
SP500 Index (Red Line - Right Axis)
Libor rate 1 month minus US Treasury Bill yield 1 month ( blue )
Libor rate 3 month minus US Treasury Bill yield 3 month ( red )​
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