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Macro Afternoon

Nordea with the note. I can only agree:

The Fed spent most of the June meeting debating a stand repo facility for both domestic and Foreign International Monetary Authorities (FIMAs). Such a facility will be designed to safe-guard the cap of the rates corridor, which is currently NOT what the Fed is struggling with. The debate is hence a reminiscence of the September-2019 liquidity scarcity scenario, while the current response to the liquidity abundancy scenario is much more urgent.

The recent short-squeeze in bonds is not just driven by the transitionistas winning the market narrative, but also by liquidity technicalities and convexity hedging. When the Fed hints of an upcoming taper decision, it leads to weaker anticipated nominal growth down the line and accordingly weaker inflation expectations. When this is paired with the surging usage of the reverse repos (both the ON RRP and the FIMA RRP), it risks creating a negative liquidity feedback loop.

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