Halister News

(Bloomberg) -- Instead of indicating a “small probability” of a rate cut, inversion in fed funds curve may reflect “technical aspects” of money markets, Credit Suisse strategists Praveen Korapaty, William Marshall and Jonathan Cohn write in note.

• Since final reforms to money fund industry go into effect Oct. 14, expectation of a “flood of cash” into govt funds from prime funds would cause a drop in funding costs for GC
  • This decline combined with post-referendum demand may have caused the inversion
• O/N GC repo is also elevated as a result of “typical quarter-end squeeze” on dealer balance sheets and increased demand for funding long UST positions after Brexit vote
• Should be “some degree of normalization” after June 30, though GC repo may settle in 55-60bp range, above pre-Brexit 42bp
  • “That is, over the next month or two, there’s likely to be a ~15bp additional premium built into secured funding markets”
• Markets only pricing about 45% of a hike by end-2017, an “underpricing of the probability of tightening”
  • Case for rate cuts is weak “without significant deterioration of data”
  • CS stopped out of EDU6/EDU7 steepener trade; wait for positive catalysts before reentering
• Related story: Fed Fund Futures Pricing Static Monetary Policy, Not Rate Cuts
• Related story: Crane’s MF Symposium: ‘Where Does the Money Go?’: JPM’s Roever