Week InReview
Friday | May 10, 2019
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Yield Curve Worries
A part of the U.S. Treasury yield curve considered a good indicator for coming recession is heading towards a
potentially worrying level
again, driven by the renewed jitters about U.S.-China trade. But it's doing it at a time when BlackRock Inc. thinks the predictive powers of the yield curve
are fading
. The Federal Reserve doesn't seem too worried either. Vice-Chair Richard Clarida
pushed back
against suggestions the Fed will start to cut rates soon and is confident current policy will get inflation where it needs to be.
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Fannie Mae and Freddie Mac’s new overseer said the mortgage giants can be freed from government control even if Congress doesn’t pass a housing-finance overhaul, while signaling that lawmakers will get “more than sufficient time” to come up with a plan of their own. (Bloomberg Politics | May 8)
The US Treasury yield curve is headed back toward inversion, an early indicator of an impending recession. The premium paid for the 10-year note over the three-month bill has contracted to less than 3 basis points. (BNN Bloomberg - Canada | May 7)
The debt-to-asset ratio for nonfinancial publicly traded companies is close to the highest level in 20 years, the Federal Reserve said in a report on financial stability. Lending to the most indebted companies is near levels hit right before the financial crisis, but overall the financial system "appears resilient," the central bank said. (Reuters | May 6)
Banks are aiming to replace overnight loans with deposits to free up cash they otherwise would be required to hold under the Dodd-Frank Act. Regulators give banks more credit for deposits, and banks are able to use some cash reserves for loans and investments. (The Wall Street Journal | May 6)
Synthetic collateralized debt obligations, or CDOs, are the latest focus of concern over a return to financial crisis. (Financial Times - opinion | May 2)
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Banks safe from a leveraged loan implosion: Fed's Quarles
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(May 7) — Federal Reserve banking watchdog Randal Quarles joked Tuesday that the way some commentators discuss the leveraged loan market, you’d think it’s as threatening as an asteroid careening toward Earth.
While the lending does pose risks, a doomsday outcome seems extremely unlikely for the US banks the Fed regulates, Quarles said at a Yale University event.
Quarles, the Fed’s vice chair for supervision, said an issue for concern is who is investing in securities tied to the debt, known as collateralized loan obligations. Such investors could suffer losses should the market turn, Quarles said. He noted that he doesn’t think U.S. banks are substantial buyers, because the Fed has concluded that they have limited “backdoor exposure” to CLOs.
He asked: “Is it Japanese banks, as anecdotally we hear? Is it other banks? Is it non-banks?” Global regulators need to know the answer to those questions before they can assess whether to intervene in the rapidly growing market, Quarles said.
Key Details
- The Fed feels safe for now about banks’ exposure because after originating leveraged loans, lenders immediately sell the debt off, Quarles said.
- Quarles said he’s directed the Financial Stability Board, an international group of regulators that he leads, to research leveraged lending.
- This week, the Fed said in its twice-yearly Financial Stability Report that leveraged lending, which often funds mergers and acquisitions involving corporations with heavy debt load, is growing fast and exhibits decreasing protections for lenders.
- Quarles said Tuesday that the lending doesn’t yet create “financial stability concerns” for the Fed.
- He also said that CLOs are generally set up to be stable and not vulnerable to runs, but “if there were to be a sudden repricing of the assets inside of them, the holders of the CLO exposure could lose money.” While losing money is part of investing, he questioned whether there are firms that are heavily invested in these funds and could be vulnerable to runs themselves.
Source: Bloomberg Government
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Experts offer insights on how cybercriminals work
IBM and Google researchers have tracked activities of cybercriminal enterprises and conclude they often operate in much the same way as legitimate entities, competing for business and structured with a CEO and specialist project managers to fulfill various functions. IBM security expert Christopher Scott says it is valuable to know as much as possible about these operations, because "if you know the tactics properly, you can really focus the security spend."
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France’s fascinating “wine treatment”
The father of medicine, the Greek physician Hippocrates, experimented with a number of wine varietals to treat various ailments, believing that, “Wine is an appropriate article for mankind, both for the healthy body and for the ailing man.”
How much of the internet is fake? Turns out, a lot of it, actually.
Studies generally suggest that, year after year, less than 60 percent of web traffic is human; some years, according to some researchers, a healthy majority of it is bot.
Experts discussed how to manage your slow time
Most advice about time management focuses on how you can increase your efficiency when you are oh-so-busy with work. This advice takes a different approach by looking at what you can do to manage your time when things slow down.
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