Is the Traditional Christmas Nightmare for Funding Markets Over?
With the end of 2020 mercifully coming into view, there’s one holiday tradition that investors seem markedly less worried about this year—a sudden dollar-funding squeeze in December.
In recent years, short-term borrowing costs in U.S. dollars, particularly for investors overseas, have often surged in December as major banks rein in activity to prevent regulatory charges.
This year, the Federal Reserve has done a lot of the heavy lifting to prevent a repeat. As recently as June, foreign central banks had around $450 billion in cross-currency swaps outstanding, offering dollar-hungry foreign banks access to greenbacks when private lenders were balking at offering them.
That figure has now declined to just below $8 billion. And despite the low current takeup, merely knowing the facility exists until at least March is a balm to borrowers.
But even with the program in place, analysts who pay close attention to market plumbing are divided over how much risk there is of December stress this year.
Zoltan Pozsar, the repo and money-market guru at Credit Suisse, suggests the risk is low. Not only is the Fed supportive, but few major U.S. banks seem at risk of higher surcharges due to the global systemically important banks scores given to them by the Fed, based on their second-quarter scores.
瑞士信贷(Credit Suisse)回购和货币市场专家佐尔坦·波兹萨尔(Zoltan Pozsar)表示，风险很低。不仅美联储表示支持，而且几乎没有几家美国大银行似乎面临更高附加费的风险，因为美联储根据第二季度的得分对全球具有系统重要性的银行进行了评分。
Interest-rate strategists at J.P. Morgan don’t quite agree, suggesting that since practically no funding squeeze whatsoever has been priced in over the turn—the end of the calendar year—the main risk is being too sanguine. They note banks’ equity prices are a key influencer of their GSIB scores, and that the Fed’s decision to bar large banks from buybacks prevents them from trying to reduce that element of the score.
The early signs of high efficacy in vaccines by Moderna and Pfizer has sparked equity-market rallies that disproportionately benefited beaten-down value stocks like banks. The S&P 500 financials index is now down by only around 10% for the year to date, from a trough of more than minus 40% in March.
Some parts of the dollar-funding apparatus would look weaker this year than last without the Fed’s support. Assets held by prime money-market funds, a dollar-funding source for overseas banks, have continued to decline. Two decisions to close some of the world’s largest prime funds have reduced the total to around $577 billion, now well below the March nadir, and the figure still seems to be falling.
This year, the chance of a sudden blowup looks low. But with so much riding on a combination of central bank support and regulatory happenstance, the conditions that made it so could be fleeting. Christmas panic in dollar funding is likely to be canceled this year, but the tradition can’t be consigned to history yet.