Interest Rates/Fed/Yield Curve/Stock Market Flashcards
What was the size of the Feds balance sheet in 2007, and what is its size now?
$870 billion in 2007 $4.5 trillion in 2018
How did the Fed purchase all of the t-bonds and MBS during the financial crisis?
It essentially printed money to increase its reserves to purchase those securities
Total US Retail sales grew ____% since last year?
5.1%
Current discount rate and fed funds rate?
Discount rate- 3% Fed funds rate- 2.5%
Why are retail stocks trading at a discount to their highs?
A lot of growth was priced in this year due to tax cuts, strong earnings, etc. But, I think investors are now nervous that those effects won’t last as long into the future. Plus, the onset of market volatility, etc is driving down prices. All in all though, earnings are great this year and retailers have performed well.
What are the Fed’s principal assets on its balance sheet? What are its liabilities?
US Treasury Bonds and Mortgage Backed Securities Liabilities: US Currency and reserve deposits that banks and other institutions hold at the Fed
How many interest rate hikes did the Fed conduct this year?
4
What is the neutral rate?
Fed funds rate/discount rate that is neither accommodative nor restrictive
Explain the idea of draining liquidity as a part of the fed unwinding its balance sheet?
The Fed is selling it treasury securities, which means money is being pulled from financial institutions. Governments held the money from the Fed at the banks. Banks are now having to give that money back to the Fed as the assets are swapped. Now, banks have less cash. Financial institutions must maintain certain reserve requirements, thus those institutions are having to sell other securities to maintain their cash reserves. Fed must issue more clear guidance regarding reserve requirements.
What does a return to normal monetary policy mean?
Fed is raising interest rates to its long term neutral rate and it is unwinding its balance sheet
What is the discussion around flex in leveraged loans?
Banks are asking for more room when agreeing to finance certain leveraged loans. Banks take losses if they can’t sell loans to investors according to borrower’s agreement. Investors are demanding better terms for investing in leveraged loans. A lot of banks have already taken losses. They are selling the loans at a big discount. Private equity loan market becoming more tight. Increased borrowing costs for PE firms. Less LBOs?
Why would an investor purchase a 5 year treasury security that has a lower rate compared to a 3 year treasury security with a higher rate?
- Reinvestment risk - Timeframe of payment horizon for pension funds, etc
What effectively happens when the fed unwinds its balance sheet?
?
Why would the yield curve invert?
Yield curve inverts because short term rates are higher than longer term rates. This results from liquidity tightening and restrictive credit markets in the short term and perhaps coupled with lower long term growth, leading to an inverted yield curve.
What is an inverted yield curve?
Short term treasury rates are greater than longer term rates. Signals tightened borrowing conditions now (tightened liquidity), thus perhaps indicating tough economic conditions
