Halister News

(Bloomberg) -- (Corrects 5th bullet to leverage ratio calculation.)

• Fed balance-sheet runoff will likely result in tighter funding conditions -- higher unsecured and secured rates and bill yields -- as reserves and RRP balances shrink on the liability side, Credit Suisse strategists led by Praveen Korapaty say in Sept. 19 note. 
• Decline in reserves “picks up pace” around 2Q 2018 and may be helped along by a resolution of the debt ceiling impasse; this should result in wider cross-currency bases, as well as higher secured funding rates since increased T-bill supply is a product of SOMA runoff
• It’s also possible government money market funds start to lose assets under management once reserves “hit levels where banks are forced to compete for deposits, though that’s probably further into the future”
• Runoff could potentially affect the way banks manage their high quality liquid asset (HQLA) portfolios; drop in excess reserves below ~$500b-$700b may cause fed funds or O/N repo to trade above IOER on a consistent basis
• More immediate problem for banking sector is if their balance sheets start shrinking alongside the Fed’s; if retail deposits dwindle then bank liquidity coverage ratios (LCR) would deteriorate
• Factors that may impact short-term rates beyond balance-sheet shrinkage include change in the leverage ratio calculation
• On asset side, Credit Suisse estimates ~50bp increase in 10Y term premia over the course of the entire unwind, assuming $3t “final” balance sheet size and 40% of QE unwound; only 15-20bp repricing by end-2018
• Other factors that may push UST yields higher include larger deficits, potential new fiscal measures like tax cuts and ECB taper

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Greg Chang