LIBOR To Be Phased Out By 2021 ($350 Trillion In Securities At Risk)

The world’s most important reference index, LIBOR, setting the price for $350 trillion in loans, credit and derivative securities, is being phased out by 2021.  UK’s Financial Conduct Authority which regulates Libor, said the index would be phased out and that work would begin for a transition to alternate, and still undetermined, benchmarks by the end of 2021.

The Federal Reserve has already been gearing up for the replacement: last month the Alternative Reference Rates Committee, a group made up of the largest US banks, voted to use a benchmark based on short-term loans known as repurchase agreements or “repo” trades, backed by Treasury securities, to replace U.S. dollar Libor. The new rate is expected to be phased in starting next year, and the group will hold its inaugural meeting in just days, on August 1.

For reference, here is a chart of several short-term rates including the doomed LIBOR  1 month, The Fed Funds Target rate, the EFFECTIVE Fed Funds rate and the USD 1 Month GC Govt Repo rate. In this chart, you can see the problem with LIBOR during the financial crisis.

The last five year track record for several short rate measure illustrates the potential problem with replacing LIBOR with another index. Obviously, The Fed Funds Target Rate has little volatility. The Effective Fed Funds rate is noisy. LIBOR 1 Month is out. Perhaps the Repo rate (the discount interest rate at which a central bank or bank repurchases government securities) is one candidate.

The problem is that the 1 month Reverse Repo rate is more volatile than 1 month LIBOR. And notice in the first chart that Repo (or Reverse Repo) rates had some unsmooth readings on the downside (where LIBOR had some unsmooth readings on the upside).

Since millions of dollars of adjustable-rate mortgages (and CMOs) are indexed to LIBOR, this should represent an interesting transition.

Yellen Hints That The Fed’s Balance Sheet Unwind Could Start In September

Just like a request to take out the trash, Yellen and The Fed are saying that the long promised balance sheet unwind will start soon .. like in September.

Why not now? Oh, inflation is sufficiently below their target rate of 2%.

Yes, Yellen has a lot of excess baggage. Here is The Fed’s balance sheet.

Not to mention $2 trillion in excess reserves.

I see Fed people.

Just like The Fed, not every gift is a blessing.

Fed Keeps Rates Unchanged, But Sees Inflation Coming! (Yellen Sees Dead People)

Yes, Janet Yellen is channeling “The Siixth Sense” in that she sees inflation above 2% (not dead people).

The Federal Reserve’s Open Market Committee (FOMC) surprised absolutely no one by keeping the Fed Funds Target rate unchanged.

The implied probability of a Fed Funds rate increase doesn’t exceed 50% until March 2018.

Yellen sees inflation topping 2%. Which it has only achieved briefly in briefly in 2012. And BEFORE The Fed entered the market in a big way with QE.

Here is a video of Yellen’s announcement of no rate increase, but seeing inflation above 2%.

New Home Sales Slow In June, Still Stuggling To Recover After Housing Bubble

New home sales rose, but modestly disappointed in June (610k vs 615k exp) with a small downward revision to May.

New home sales continue to climb … back to pre-housing bubble levels.of the early 1990s as do mortgage purchase applications.

Although the median price for new home sales fell over 4% in June, they are still up 52.2% since October 2010.

Remember all the cheerleading from the Mortgage Bankers Association (MBA) last week ove the massive surge in mortgage refinancing applications? In reality, refi applications are stuck in a rut since the last increase in mortgage rates.

Yes, we are still picking up the trash from the housing and credit bubble of the last decade.

The Gleaners by Jean-François Millet. Sort of.

Case-Shiller Home Prices Rise 1% In May (5.6% YoY), Seattle Leads At 13.3% YoY

Home prices keep on rising. According to the S&P Case Shiller repeat sales index, home prices rose 1% in May and 5.6% YoY.

But the Case-Shiller home price index continues to grow at over twice that of inflation and wage growth.

The biggest winner? Seattle. The slowest growing? Cleveland, Chicago and Washington DC.

West coast home prices really took after after The Fed’s third round of quanitative easing (QE3).

westcs

The Heat Is On! Venezuela 10Y Yield Spikes to 30% (2Y Yield at 60%!)

In the immortal words of the late Glenn Frey, “The Heat is on!!”

And its not Arizona-type heat. But protesters outraged at President Nicolas Maduro with threats of a new constitution and staggering inflation. And no toilet paper.

Venezuela’s 10 year sovereign yield just spiked to 30%.

And near 60% at the 2 year mark.

Now that the Dodger’s ace Clayton Kershaw is on injured reserve for a while, here is a possible replacement from Venezuela. I mean, this dude throws fire!