Fixed Income Markets Flashcards
What are the six major sub-sectors of the U.S. fixed income market?
Who issues these debts?
- US Treasuries
- Agency debt market
- Mortgage-backed securities (MBS)
- Agency mortgage-backed securities (AMBS)
- Corporate bond market
- Municipal market
The Treasury market is debt issued by the U.S. government;
Agency debt market is debt issued by government agencies, such as Freddie Mac and Fannie Mae, to support the housing market;
MBS market is the collection of loans to homeowners to fund home ownership (i.e., mortgages) with the Agency MBS subsector referring to government agency guaranteed mortgages;
the corporate market is debt of corporations;
and the municipal market is the debt of cities, states, and other local governments in the United States.
What proportion of the fixed income market (in terms of volume) does the US treasury sub-sector make up?
Over half of trading volume in the fixed income market is focused in the treasuries.
Treasuries and MBS combined make up what proportion of the fixed income market?
About 90%
What year was the Federal Reserve established?
1913
What happened to the amount of excess reserves at the Fed during the financial stress of 2007 and 2008?
Excess reserves grew to unprecedented levels, from less than $10 billion to nearly $1 trillion.
Which one tends to be higher, the federal funds rate or the discount window rate?
The discount window rate tends to be higher than the federal funds rate.
What is the source of stigma that is generally associated with borrowing form the discount window?
The market may take it as a sign that the institution is in trouble.
To manage a market, one can affect either the supply or the demand side.
There are three basic actions the Fed can take. What are they?
- Conduct open market operations (buying and selling securities)
- Change a variety of short-term rates or targets
- Change the reserve ratio requirement
Why is the discount rate typically set higher than the fed funds target rate?
To discourage institutions from borrowing from the fed, and encourage them to borrow from one another at a rate that approaches the Fed’s target.
What is the immediate goal of quantitative easing?
To increase the size of the Fed’s balance sheet in order to lower longer-term interest rates.
What kind of investor environment is the Fed trying to encourage when it engages in quantitative easing?
The hope of quantitative easing is that as longer-term interest rates decline, investors may be less willing to hold safer assets (due to lower returns) and invest more in riskier asset classes (such as equities).
This dynamic would raise asset values from housing to equity prices across the economy.
What is the make up of the fixed income market?
The mortgage, Treasury, and corporate bond markets form the three largest components, about 20% to 25% each; the remaining markets each form similar smaller
fractions, about 7% to 9% each
Define each:
M1
M2
M3
“money supply” here refers to the monetary aggregates known as M1, M2, and M3.
M1 is cash and checking deposits.
M2 includes M1 and other relatively safe accounts, such as money market deposits.
M3 is even broader and includes various nonindividual accounts, such as institutional money market deposits and repurchase agreements
What is the function of excess reserves in the banking system?
Excess reserves in 2007?
Excess reserves in 2015?
It is the excess reserves that can be traded by banks, depending on how attractive interest rates are in the federal funds markets, and can also leave excess reserves if banks need to use the funds to make loans to individuals and businesses. Before the credit crunch in 2007, the excess reserves earned no interest from the Fed. However, during the financial stress of 2007 and 2008, excess reserves grew to unprecedented levels, from less than $10 billion to nearly $1 trillion. This made it difficult for the Fed to manage the supply/demand balance for reserves.
After congressional approval, the Fed was authorized to pay interest on excess reserves, which it could change in order to incentivize banks to keep excess reserves at the Fed instead of trading them in the market. The interest rate paid on excess reserves thus added another tool to the Fed’s list of short-term rate controls.
Difference between marketable debt and nonmarketable debt.
Marketable debt can be resold to other investors while nonmarketable debt is held to maturity.
