The Federal Reserve Bank of New York has released three new articles focusing on macroeconomic, banking and financial market topics.
The first article, Negative Swap Spreads, looks into factors driving why US interest rate swap spreads have become negative for many maturities over the past two years.
This movement of swap spreads into negative territory has been attributed to idiosyncratic factors such as changes in foreign reserve balances and liability duration management by corporations, it said.
However, the authors assert that regulatory changes affected the willingness of supervised institutions to absorb shocks and that when exogenous factors narrowed spreads, the leverage requirements reduced incentives for market participants to enter into trades that would have counteracted the effects of exogenous shocks.
The analysis suggests that, given balance sheet costs, spreads must reach more negative levels to generate an adequate return on equity for dealers, suggesting there may be a “new normal” level at which dealers are incentivised to trade.
Trends in Credit Basis Spreads looks into the large, prolonged dislocations in credit market basis trades during the second half of 2015 and the first quarter of 2016.
The Pre-Crisis Monetary Policy Implementation Framework describes the Fed’s operating framework for monetary policy prior to the expansion of its balance sheet during the 2007-2009 financial crisis.
During this pre-crisis period, aggregate reserves were scarce; as a result, small changes in reserves would affect Fed Funds rates.
The authors find that the pre-crisis framework met the Fed’s monetary policy objectives by keeping rates close to target but had certain negative effects on financial market functioning and employed operating procedures that were rather opaque and inefficient.
The first and second articles are both authored by Nina Boyarchenko, Pooja Gupta, Nick Steele and Jacqueline Yen. Boyarchenko is a senior economist in the New York Fed’s Capital Markets Function. The third article is authored by Alexander Kroeger, John McGowan and Asani Sarkar.
Kroeger is a former senior research analyst in the New York Fed’s Research and Statistics Group; McGowan is an assistant vice president in the New York Fed’s Markets Group. Sarkar is an assistant vice president in the New York Fed’s Research and Statistics Group.
