22 March 2019 FT — Articles to Read

22 March 2019


Question: According to MSN: Money, what is the average home value?


Fed has shifted to a far more appropriate stance – Pg. 8

–          ….2019 would be the first year since 2014 in which it would not raise interest rates

–          The Fed left interest rates on hold at a range of 2.25-2.5%, where they had been since December.  It also said that from September it would stop automatically reducing the Fed’s balance sheet, still swollen from the vast bond holdings bought up during its programmes of quantitative easing

–          The BoE, meanwhile, which rightly left interest rates on hold on Thursday, is in a far less comfortable position, through no fault of its own.  As well as facing a distinct lack of vim in the UK economy, the BoE is trying to set policy in face of a series of wildly varying potential outcomes of the Brexit negotiations while being bound by convention to assume that the government policy of a smooth exit from the EU will in fact take place.  If ever there was a situation which cried out for a central bank to hold its nerve but be prepared to move extremely rapidly if called upon, this is it


A shift away from Libor could threaten stability – Pg. 9

–          Global regulators are cheering a transition from Libor, the now infamous London interbank offered rate that underpins $370tn in financial contracts, to a slow of new benchmark rates

–          …the shift from Libor to a new reference rate may seriously undermine financial stability

–          Libor has been used for decades to determine interest rates on everything from student loans to complex derivatives

–          The total value of financial contracts pegged to the rate is more than 18 times the US’s GDP

–          …in 2017, the UK’s Financial Conduct Authority announced that it will stop requiring banks to estimate the various Libor rates beyond 2021 – effectively benching Libor

–          There are two reasons Libor is being pulled from the game….the rates have become theory rather than reflecting actual costs

–          Second, it turned out that asking bakers to estimate Libor was a bit like asking…..both led to manipulation.  Banks have paid nearly $10bn in penalties for rigging Libor during the financial crisis to boost profits or hide balance sheet weakness

–          In the US….a new player….secured overnight funding rate (Sofr), this rate is based on actual transactions, in the Treasury repurchase market, where a wide array of financial services firms use Treasuries as collateral to borrow and lend overnight

–          …daily volume of trading in Sofr-based products is now around $780bn, much larger than that for Libor

–          …Sofr has issued too…there is only one maturity, overnight (Prof Note: laughing hysterically!  Classes are going to LOVE this!  The most common and incorrect answer to my question, “How many Libors are there?” is, “One.”  Sounds like all these students may have been correct all along, just for Libor’s replacement, i.e. they were apparently thinking ahead! J)

–          The Sofr benchmark has also been more volatile than Libor, particularly at the end of the quarter or year when firms convert assets into cash, pushing up rates

–          Shifting existing contracts from Libor to Sofr will be rocky.  More than 80% of Libor-linked financial instruments will mature by the end of 2021, but many will be renegotiated, and the rest must be converted.  Libor is unsecured and Sofr uses collateral, so rates for the former should be higher. The transition will create winners and losers and with it a legal feeding frenzy (Prof Note: I am currently negotiated with a bank the lending rate on a new facility.  They are insisting on Libor with the caveat there is language in the loan document for the transition.  My comment, “The language is untested in court.”  Our tanks are gathering at the border…more to come…)

–          ….more than 40% of outstanding Libor-based residential mortgage loans mature after 2021.  If Libor vanished, most floating-rate loans would be fixed at the last quoted Libor rate, which is not what those homeowners signed up for (Prof Note: This boils my blood!  This is why I feel mortgages should have an entrance examination.  Individuals must understand what they are signing!)


Bull run longevity under threat after Fed’s dovish message – Pg. 19

–          Global equities have gained 12% in 2019 – the best start to a year in two decades.  Yet government bonds have rallied, with the yield on the 10-year US Treasury now close ot the level it was at when the Fed began lifting rates in 2015


Answer: $225,300