Top of the Street

Markets: Money market fund demand for short-maturity bank debt
Prime money market funds have to start reporting daily NAVs this fall, and JPMorgan has steadily pointed out the likely rise in MMF demand this year for investments with short maturities. The latest US Fixed Income Markets Weekly points out that issuance of 6-month or long bank CP/CDs has steadily drifted lower this year, with issuance of 1- to 3-month debt rising. The weighted average life of prime MMFs is now at 48 days, according to iMoneyNet, the lowest mark since 2011. (JPMorgan).

Markets: The education of student loan ABS investors
Investors in student loan ABS learned last year that even securities guaranteed by the US government could default if repayment based on borrowers’ income pushed principal beyond the scheduled maturity date. The latest snapshot of the US Department of Education’s $1.2 trillion student loan portfolio as of January 1 showed a 48% surge since 2014 in enrollment in plans for distressed borrowers to lower their payments based on income, and a 140% surge since 2013. The department continues to market income repayment plans to borrowers. The department paints the full picture on its site with a piece not titled with investors in mind, New Student Loan Report Reveals Promising Repayment Trends. (Milepost).

Markets/Economy: Rental supply catching up with demand
Supply of multi-family housing may have started outstripping demand. With the crash in single-family housing after 2008, new demand for multi-family rentals drove vacancy rates from 11% in late 2009 to 7% in 2015. But vacancy rates look set to edge higher, according to JPMorgan. New completions of multi-family units could surge 12% this year, dampening core inflation and slowing the issuance of CMBS backed by multi-family loans. (JPMorgan, Milepost).

Markets: The rise and fall of recession risk
The research staff at the FRB has rolled out a new crystal ball for spotting recessions that shows a clear rise in risk over the next 12 months. The model at the end of February showed a 55% chance of recession between March 2016 and February 2017; at end of March, however, it dropped toward 35%. The new tool uses a component of credit spreads that reflects more than just default risk, and it combines that spread with the slope of the yield curve and the real fed funds rate. Wide credit spreads in February and their dramatic tightening in March drove the rise and fall in projected risk. Check the FRB’s site for Recession Risk and the Excess Bond Premium. (Federal Reserve Board)

Markets: Oil and inflation
Oil prices and market-implied expectations for inflation have moved down together since June 2014, linked, according to the latest from the Fed, mainly by declining expectations for economic growth. Fed researchers put changes in oil prices into two buckets: days when oil prices moved with prices in equity and metals, and days when oil prices moved against those markets. The former days looked attributable to changes in oil demand, the latter to changes in oil supply. Demand days explained far more of the move since mid-2014. One conclusion: if oil supply now starts to tighten, growth and inflation expectations could drop further. See the FRB’s site for The relationship between oil prices and inflation compensation. (Federal Reserve Board).

Markets/Banking: Good stress
At some point in the next few months, the market will see the results of the 2016 Comprehensive Capital Analysis and Review (CCAR) and the Dodd-Frank Act Stress Test (DFAST) on bank holding companies with $50 billion or more in assets. If past is prologue, the market will respond. Prices will move, especially for the most leveraged companies. Trading volume will spike. Credit default swaps will move. Option prices will drop in the aftermath. And, most importantly, the Fed will cheer that once again it has put valuable information in the market about the health of US banks. That’s the case made in a piece of recent FRBNY research on market response to the release of DFAST and CCAR results, a topic dear to a Fed worried that stress testing might become predictable and irrelevant. See the FRBNY’s staff work on Evaluating the Information in the Federal Reserve Stress Tests. (Federal Reserve Bank of New York).

Markets/Economy: The Fed just wants to have fun
Even the Fed decided to have some fun on April Fools’ Day. The New York branch's Liberty Street Economics blog posted an interview with one of its own economists on the historical accuracy of the film The Big Short. Among the points scored by the blog: • Lots of people thought the bull market in housing had gone way too far after 2005, including Nobelist Robert Shiller and The Economist magazine, and not just the few renegades portrayed in the film. •  The majority of investors skeptical about housing stayed on the sidelines with only the few taking the substantial risk of selling short, so score one for the film. • Investors had scads of data that could have tipped them to the trouble brewing in private MBS, but most skipped the homework and relied instead on the securities' AAA ratings; give this one to the film, too.  • Losses on AAA securities primarily came in CDOs with most 'simple' AAA classes dodging any losses, not quite the picture painted by Hollywood. Who knew that even a financial crisis could be fun? (Federal Reserve Bank of New York).