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The fire in Treasurys

The fire in Treasurys



Just where was the fire that caused the Federal Reserve to buy $1.3 of treasury debt in a month -- financing all treasury sales and then some? I've been puzzling about this question in a few posts, most recently here. Commenter "unknown" impolitely but usefully points me to a nice paper by Andreas Schrimpf, Hyun Song Shin and Vladyslav Sushko that explains some market mechanics. I am still not persuaded that these gyrations motivate or justify the Fed buying these or more trillions of debt, but there is an interesting story here.

Treasury yields

Their first graph shows stock prices and bond yields. As risk and risk aversion rose, as they always do in bad times, stock prices fell and bond prices rose, with yields falling.

Trouble starts on  9 March when "the market experienced a snapback in yields" Look hard at the graph. The blue line rises a bit while the red line continues to fall.

OK, but still -- is it a disaster that the US treasury, that had been borrowing happily at 1.8% in January, must borrow at 0.8-1.2% in March? Is it such a disaster that the Fed must buy all new issues of debt?

"Arbitrage" redux

What caused the "snapback?" here is where the paper gets interesting. Basically a bunch of hedge funds replayed an age-old strategy and got caught. Plus ça change. They bought treasury bonds and simultaneously sold them in futures markets. Since treasury bonds are great collateral they can lever up a small price difference to make a lot with little investment.

But even arbitrage opportunities are not risk free. Prices that are slightly off can get further off before they eventually converge. And then the hedge funds need to post margin, which they don't have. So, they follow the mother of all financial fallacies -- risk management that consists of selling  positions on the way down, trying to synthesize a put option with a stop loss order. But selling to who? Everyone else is doing the same thing, markets get illiquid in times of stress (no, they've never done that before), so the price difference widens even more.

Once the funds were no longer able to meet variation margins, their positions were unwound by dealers/futures exchanges, pushing prices lower. This in turn gave rise to a classic “margin spiral”
This is the price difference that the funds had been arbitraging. The price widened -- the arbitrage got better. But this means a lot of lost money in the initial positions.

Other almost-arbitrage price relationships widened too, a now familiar phenomenon
Similarly, the market experienced severe mispricing along the yield curve (yield curve fitting errors) and between benchmark bonds and other similar securities.. indicating a breakdown in arbitrage linking various corners of fixed income markets.  

How in the world did this happen again, so soon?  LTCM redux? Metallgesellschaft? In the treasury markets? Didn't 12 years and 100,000 pages of Dodd Frank, and ten times that of academic papers on various "fire sales" and "spirals," and a small army of regulators put a stop to all this? All the massive regulation did, apparently,  was to further restrict dealer and bank balance sheets, as seen in the repo eruption last summer, and make liquidity worse.

Their policy summary: monitoring should look beyond current conditions and ask the “what- if” questions that are relevant for potential market stresses. To be effective, such fully fledged stress tests must assess the potential scope for forced selling and feedback loops, especially in tranquil periods when leverage is building up.
"Should have" is is the right verb tense! Just why in 12 years did none of this perfectly obvious stress testing already happen?

They provide one answer implicit:
In this context, the reaction function of the central bank is an important background factor. 
Yes. Everyone knew the Fed will ride to the rescue, so why keep dry powder around? And the expectation proved true once again. The Fed is fueling the moral hazard as we speak.

The fire? 

So,  a bunch of hedge funds sold volatility, again, and lost money, again. Little apparent arbitrage opportunities arose between similar securities. (Is 12 basis points a financial calamity? four?). Not enough investors with the expertise to arbitrage 4 basis points spreads are around willing take mark-to-market risk in a time of immense volatility and uncertainty. Capital does move slowly. It was harder for a while for other people whose idea of risk management is selling on the way down to dump securities.

Does this justify buying $1.3 trillion of treasury debt? 

Financing the treasury and buying the debt

I found interesting insights here
Under normal circumstances, dealers would be able to alleviate market stresses by absorbing sales and building up an inventory of securities. But, dealers’ treasury inventories had already been stretched, especially from 2018 onwards, as they needed to absorb a large amount of issuance (Graph 3, right-hand panel). Far from there being a shortage of safe assets, there was a glut* in the run-up to Covid-19. 
[my emphasis]

I found this comment particularly revealing, but opening a lot of questions. We are so used to the claim of a "global savings glut" "safe asset shortage"  that signs of these stories running out of steam are  interesting.

This could be a question to which massive purchases are the answer -- the treasury is finding it hard to sell more debt. Of course, treasuries that turn to central banks to buy their debt is not a circumstance that usually ends well.
The recent shifts in the investor base of treasury securities from official sector investors (eg foreign central banks) and long-term investors towards leveraged traders and other negative convexity investors give pause for thought regarding potential future volatility from endogenous feedback loops. 
Wow. If this is true, the game is up. We can't sell trillions and trillions to, oh, the central bank of China. But "negative convexity investors" are not a fundamental source of demand. They buy treasurys only to sell futures, and quickly close out their positions. They are not funneling a trillion dollars a month of new savings to treasurys. So if this story is true, there are no fundamental investors, and that's why the Fed is buying. 

The paper attempts to give a different rationale, that the Fed really was buying in order to make the markets more liquid. (Again, just why this is a huge social problem is hard to tell) The paper claims that the markets calmed because the Fed bought up all these extra treasurys from the dealers, removing the treasurys from the dealer's books. In order to get dealers to arbitrage again,
the authorities [Fed] may need to absorb sales directly rather than doing so indirectly by lending to dealers, especially when funding is not the relevant constraint. This may also explain why, on this occasion, the Fed’s rapid purchases of securities out of dealers’ inventories (to the tune of about $670 billion) appeared more effective in stabilising the market than the provision of liquidity via repo operations, where take-up was relatively subdued.
Translation: the big puzzle in all of this is how the Fed by simply buying can restore "liquidity." To restore liquidity you have to buy and sell, take the arbitrage trades.

Normally (and to the tune of trillions right now in other markets) the Fed simply lends money to dealers who can then trade more. (And make more money. Remember the Volcker rule, don't finance trading by deposits? The idea here is to finance trading by borrowing from the Fed!) But if the dealers are capital constrained, or regulation constrained, that doesn't help. So if the fed buys up all the risky assets from the dealers, the dealers can start up all over again.

I presume the last graph doesn't have up to the minute data and would show... -$470 billion on dealer balance sheets? To buy $200 billion from the dealers why did the Fed have to buy $1.3 trillion?

Why did dealers accumulate so much treasury debt in the first place? If they didn't want to hold the treasurys they should have sold them, and prices should have gone down -- interest rates should have gone up. They had to want to hold the treasurys. That proved a wise decision as they made  ton of money as interest rates declined. But after yields went from 2 to 0.5%, in the "de-risking" demand for treasurys, why didn't they sell off their book again? How much more money do they want to make? Why did they finally sell to the Fed (at what price?)

Bottom line

So why did the Fed buy? Is it a  “dealer of last resort” as the paper puts it, or is it the  buyer of last resort? Was there really a fire, or just the usual bunch of hedge funds screaming that they lost money writing out of the money puts, once again?


* Picky comment. Economists should never use the word "shortage" or "glut," at least absent a price control. They carry a pejorative implication that something is wrong about a demand or supply curve shifting, and needs policy response. The original "savings glut" was East Asian countries that decided keeping some liquid assets around was a good idea in case of trouble, a strikingly old fashioned idea that might look mighty good right now as pervasively indebted America looks around to pay bills for a few months.

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This Hack Makes Flying Spirit Better Than JetBlue Or Southwest

It’s possible to make the no-frills, low-cost carrier as nice as flying much more expensive airlines (for less money).



It may seem impossible that the low-cost, no-frills air carrier could be an improvement over Southwest Airlines or its would-be merger partner JetBlue, but it’s possible.

Before the covid pandemic, I flew Southwest Airlines fairly religiously in order to maintain my A-List status. You need 25 one-way flights each year (or 35,000 miles) to keep that status and I flew just enough to keep eking out my renewal each year.

A-List has some meaningful perks for Southwest Airlines  (LUV) - Get Free Report passengers. You get same-day standby for free, which was very convenient when I was flying for work and a meeting got canceled allowing me to leave earlier. In addition, A-List members can change their flights with no fees or penalties, and most importantly, they get priority boarding status.

Southwest boards based on its A, B, and C boarding groups with 60 slots in each group. A-List members got checked in early and were guaranteed that if they don’t get an “A” spot, they could check in between the A and B groups. They can also do that if they fly standby and missed the check-in window altogether.

Every year, I tried really hard to keep those perks, but in 2022, it simply was not possible. I didn’t travel anywhere close to the amount I did before covid and had to let my A-List status expire as the year ended.

I was not super happy about it, but as my travel ramped up, I was being forced to fly like a regular person with no status. That changed, however, when Spirit Airlines ran a quick promotion where people with top-tier status at a number of major airlines and hotels could buy Spirit’s top-tier Gold loyalty status for $100.

It’s the best $100 I have ever spent because it elevates the experience on the no-frills airline.

Spirit is a low-cost carrier.

Image source: Shutterstock

Why Spirit Airlines Gold Status Is So Valuable

A low-cost carrier, Spirit charges for everything. Your basic fare gives you the right to get on the plane with a personal item (think a purse or a small backpack). Fares are very low because you pay for everything from checked bags to a full-size carry-on to getting an actual seat assignment. Spirit passengers even pay for water and soda, and they can opt to pay for snacks and perks like being able to get through airport security faster.

As a Gold member, I pay the basic fare price and then get bags and a premium seat assignment for free. On the three Spirit flights I have booked, I was able to get an exit row seat, with much more legroom for no extra charge. I also got access to a priority security line at the airport and got to board in the first group.

In addition, I also got one flight change (for each leg of my trip) free (which I did not need to use on this trip).

What It’s Like Flying As a Spirit Gold Member

Spirit tends to fly out of the least convenient terminal at every airport (at least that has been my experience). That was true of my Fort Lauderdale flight where the airline flies from Terminal 4, which has a small parking lot that never seems to have any spaces. That forces you to park in a garage that’s farther away, but it’s well marked and walkable or there’s a tram if you are willing to wait.

My flight was a 9:30 p.m. non-stop to Las Vegas on a Saturday night. There were very few people in the security line and while I had access to a priority Spirit line, I’m also a Clear member and opted to go with that experience instead.

Once I cleared security, I made my way to my gate passing a few shops and some restaurants. I stopped to buy some snacks, as my first boss drilled the idea of never getting onto a plane without an emergency snack into my head before my first business trip 30 years ago (I was 19).

The gate had plenty of seats and we were scheduled to board at 8:45. When boarding was called, at roughly 8:47, the woman at the desk called for people needing extra assistance, families flying with kids under two, and active military members. There were none of those, so she then called for Group 1 and since I was standing near the gate, I was literally the first person on the plane.

In my multiple years of being Southwest A-List, I had never had fewer than 20 people board before me. I found my seat and while the actual seat was hard and not all that comfortable (Spirit skimps on the padding to save on fuel) the exit row legroom was impressive. In fact, the distance between my seat and the seat in front of me was so great that I actually had to lean forward to type on my laptop given the very narrow fold-down tray.

My flight was not without problems. It did not have WiFi, which the airline did not announce until we were in the air (so I could not text my wife to let her know I would be out of touch for five hours). Aside from that, however, my Gold status also got me a free soda, water, coffee, or juice, as well as a choice of snacks.

So, for my very lucky $100 purchase of Gold status, I had a roomier seat than I have ever had on Southwest. I was also paying a price that was less than half what I would have paid on Southwest or JetBlue, neither of which offered a comparable direct flight.

Spirit may be no-frills for infrequent flyers, but for its elite passengers, the airline offers value and meaningful perks. It also offers 10X points for Gold members, so even with the cheap fares I’m paying, the first two Spirit flights I have booked will earn enough points to allow me to keep my status for another year.

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Who Can You Trust?

Who Can You Trust?

Authored by James Howard Kunstler via,

“I’m sick and tired of hearing Democrats whining about Joe Biden’s…



Who Can You Trust?

Authored by James Howard Kunstler via,

“I’m sick and tired of hearing Democrats whining about Joe Biden’s age. The man knows how to govern. Just shut up and vote to save Democracy.”

- Rob Reiner, Hollywood savant

Perhaps you’re aware that the World Health Organization (WHO) is cooking up a plan to impose its will over all the sovereign nations on this planet in the event of future pandemics.

That means, for instance, that the WHO would issue orders to the USA about lockdowns, vaccines, and vaccine passports and we US citizens supposedly would be compelled to follow them.

Why the “Joe Biden” regime would go along with this globalist fuckery is one of the abiding mysteries of our time - except that they go along with everything else that the cabal of Geneva cooks up, such as attacks on farmers, and on oil production, and on relations between men and women, and on personal privacy, and on economic liberty throughout Western Civ, as if they’re working overtime to kill it off. And all of us with it.

I think they are working overtime at that because the sore-beset citizens of Western Civ are onto their game, and getting restless about it. So, the Geneva cabal is in a race against time before the center pole of their circus tent collapses and the nations of the world are compelled to follow the zeitgeist in the direction of de-centralizing, foiling all their grand plans.

The “Joe Biden” regime is pretending to ignore the reality that this WHO deal is actually a treaty that would require ratification by a two-thirds vote in the senate, an unlikely outcome. In any case, handing over authority to the WHO — in effect, to its chief Tedros Adhanom Ghebreyesus — to push around American citizens like a giant herd of cattle would be patently unlawful.

That center pole of the circus tent is the wobbling global economy. It’s barely holding up the canvas over the three rings of the circus. In the center ring, the death-defying spectacle of the Biden Family crime case is playing out before a huge audience (us). This week, a gun went off at the FBI and smoke is curling out of the barrel. FBI Director Christopher Wray was forced to verify that he’s been sitting on an incriminating document for three years from a “trusted” confidential human source, i.e., an informant, stating that the Biden Family received a $5-million bribe from a foreign entity when “JB” was vice-president.

That’s only one bribe of many others, of course, as documented in the Hunter Biden laptop, and it must be obvious it represents treasonous behavior that will demand resignation or impeachment. As this spools out in the weeks and months ahead, do you think Americans will be in the mood to accept further insults such as “Joe Biden” surrendering our national sovereignty to the WHO?

Anyway, you must ask yourself: why on earth should I trust the WHO about anything? Did they not participate in laying a trip on the world with Covid-19? How did those lockdowns work out? Do you think they destroyed enough businesses and ruined enough households? How’s the vaccination program doing? Effective? Safe? Yeah, maybe not so much. Maybe killing a lot of people, wrecking immune systems, sterilizing reproductive organs, causing gross disabilities, shattering lives.

Of course, in over three years neither the WHO nor the US medical authorities showed the slightest interest in helping to figure out how the Covid-19 virus was made in a lab, and exactly how it got loose in the world. Lately, Dr. Ghebreyesus has warned the world about much worse future pandemics supposedly coming down at us. Oh? Really? What does he know that we don’t? That possibly new efforts to concoct chimeric diseases are ongoing in labs around the world? (You know that dozens of such labs were discovered in Ukraine as the war got underway there in 2022.) What’s Dr. Ghebreyesus doing to stop that?

If US orgs and citizens are involved in this “research,” why doesn’t the WHO alert our government leaders so they can stop it? (Would they? I’m not so sure.) And, who is behind it this time? The Eco-Health Alliance again, like with Covid-19? By the way, that outfit got another whopping grant last fall from the NIH to “study” bat viruses — right after the NIH terminated a previous grant on account of The Eco-Health Alliance failing to turn over notebooks and other records.

No, you cannot trust the WHO about anything. The “trust horizon” (a concept introduced by the great Nicole Foss, late of The Automatic Earth dot com) is shrinking. You can no longer trust any distant authorities. You also cannot trust the US federal government (especially the executive branch behind “Joe Biden”). And notice: the trust horizon is shrinking just as the world is de-centralizing. This, you see, is the main contradiction behind all the Globalists’ twisted ambitions to control everything, including you. They are working against the current tide of human history which is pushing everything toward down-scaling, re-localization, and re-assertion of the sovereign individual person.

That trend will become increasingly evident as things organized at the giant scale start to implode — giant retail chains, medical behemoths, hedge funds, big banks, you name it. The world no longer has the mojo for globalism. There’s reason to wonder these days whether the USA has the mojo to remain a unified national polity of states. Our federal government is not only financially bankrupt beyond any coherent reckoning, it is also morally bankrupt, and it has decided to make war against its own people. None of this is satisfactory and none of this is working. It’s time to figure out who and what you can trust and act accordingly.

Tyler Durden Sun, 06/04/2023 - 09:20

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Spread & Containment

Removing antimicrobial resistance from the WHO’s ‘pandemic treaty’ will leave humanity extremely vulnerable to future pandemics

Drug-resistant microbes are a serious threat for future pandemics, but the new draft of the WHO’s international pandemic agreement may not include provisions…




Antimicrobial resistance is now a leading cause of death worldwide due to drug-resistant infections, including drug-resistant strains of tuberculosis, pneumonia and Staph infections like the methicillin-resistant Staphylococcus aureus shown here. (NIAID, cropped from original), CC BY

In late May, the latest version of the draft Pandemic Instrument, also referred to as the “pandemic treaty,” was shared with Member States at the World Health Assembly. The text was made available online via Health Policy Watch and it quickly became apparent that all mentions of addressing antimicrobial resistance in the Pandemic Instrument were at risk of removal.

Work on the Pandemic Instrument began in December 2021 after the World Health Assembly agreed to a global process to draft and negotiate an international instrument — under the Constitution of the World Health Organization (WHO) — to protect nations and communities from future pandemic emergencies.

Read more: Drug-resistant superbugs: A global threat intensified by the fight against coronavirus

Since the beginning of negotiations on the Pandemic Instrument, there have been calls from civil society and leading experts, including the Global Leaders Group on Antimicrobial Resistance, to include the so-called “silent” pandemic of antimicrobial resistance in the instrument.

Just three years after the onset of a global pandemic, it is understandable why Member States negotiating the Pandemic Instrument have focused on preventing pandemics that resemble COVID-19. But not all pandemics in the past have been caused by viruses and not all pandemics in the future will be caused by viruses. Devastating past pandemics of bacterial diseases have included plague and cholera. The next pandemic could be caused by bacteria or other microbes.

Antimicrobial resistance

Yellow particles on purple spikes
Microscopic view of Yersinia pestis, the bacteria that cause bubonic plague, on a flea. Plague is an example of previous devastating pandemics of bacterial disease. (NIAID), CC BY

Antimicrobial resistance (AMR) is the process by which infections caused by microbes become resistant to the medicines developed to treat them. Microbes include bacteria, fungi, viruses and parasites. Bacterial infections alone cause one in eight deaths globally.

AMR is fueling the rise of drug-resistant infections, including drug-resistant tuberculosis, drug-resistant pneumonia and drug-resistant Staph infections such as methicillin-resistant Staphylococcus aureus (MRSA). These infections are killing and debilitating millions of people annually, and AMR is now a leading cause of death worldwide.

Without knowing what the next pandemic will be, the “pandemic treaty” must plan, prepare and develop effective tools to respond to a wider range of pandemic threats, not solely viruses.

Even if the world faces another viral pandemic, secondary bacterial infections will be a serious issue. During the COVID-19 pandemic for instance, large percentages of those hospitalized with COVID-19 required treatment for secondary bacterial infections.

New research from Northwestern University suggests that many of the deaths among hospitalized COVID-19 patients were associated with pneumonia — a secondary bacterial infection that must be treated with antibiotics.

An illustrative diagram that shows the difference between a drug resistant bacteria and a non-resistant bacteria.
Antimicrobial resistance means infections that were once treatable are much more difficult to treat. (NIAID), CC BY

Treating these bacterial infections requires effective antibiotics, and with AMR increasing, effective antibiotics are becoming a scarce resource. Essentially, safeguarding the remaining effective antibiotics we have is critical to responding to any pandemic.

That’s why the potential removal of measures that would help mitigate AMR and better safeguard antimicrobial effectiveness is so concerning. Sections of the text which may be removed include measures to prevent infections (caused by bacteria, viruses and other microbes), such as:

  • better access to safe water, sanitation and hygiene;
  • higher standards of infection prevention and control;
  • integrated surveillance of infectious disease threats from human, animals and the environment; and
  • strengthening antimicrobial stewardship efforts to optimize how antimicrobial drugs are used and prevent the development of AMR.

The exclusion of these measures would hinder efforts to protect people from future pandemics, and appears to be part of a broader shift to water-down the language in the Pandemic Instrument, making it easier for countries to opt-out of taking recommended actions to prevent future pandemics.

Making the ‘pandemic treaty’ more robust

Measures to address AMR could be easily included and addressed in the “pandemic treaty.”

In September 2022, I was part of a group of civil society and research organizations that specialize in mitigating AMR who were invited the WHO’s Intergovernmental Negotiating Body (INB) to provide an analysis on how AMR should be addressed, within the then-draft text.

They outlined that including bacterial pathogens in the definition of “pandemics” was critical. They also identified specific provisions that should be tweaked to track and address both viral and bacterial threats. These included AMR and recommended harmonizing national AMR stewardship rules.

In March 2023, I joined other leading academic researchers and experts from various fields in publishing a special edition of the Journal of Medicine, Law and Ethics, outlining why the Pandemic Instrument must address AMR.

The researchers of this special issue argued that the Pandemic Instrument was overly focused on viral threats and ignored AMR and bacterial threats, including the need to manage antibiotics as a common-pool resource and revitalize research and development of novel antimicrobial drugs.

Next steps

While earlier drafts of the Pandemic Instrument drew on guidance from AMR policy researchers and civil society organizations, after the first round of closed-door negotiations by Member States, all of these insertions, are now at risk for removal.

The Pandemic Instrument is the best option to mitigate AMR and safeguard lifesaving antimicrobials to treat secondary infections in pandemics. AMR exceeds the capacity of any single country or sector to solve. Global political action is needed to ensure the international community works together to collectively mitigate AMR and support the conservation, development and equitable distribution of safe and effective antimicrobials.

By missing this opportunity to address AMR and safeguard antimicrobials in the Pandemic Instrument, we severely undermine the broader goals of the instrument: to protect nations and communities from future pandemic emergencies.

It is important going forward that Member States recognize the core infrastructural role that antimicrobials play in pandemic response and strengthen, rather than weaken, measures meant to safeguard antimicrobials.

Antimicrobials are an essential resource for responding to pandemic emergencies that must be protected. If governments are serious about pandemic preparedness, they must support bold measures to conserve the effectiveness of antimicrobials within the Pandemic Instrument.

Susan Rogers Van Katwyk is a member of the WHO Collaborating Centre on Global Governance of Antimicrobial Resistance at York University. She receives funding from the Wellcome Trust and the Social Sciences and Humanities Research Council of Canada.

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