RRP No Collateral Coincidences As Bills Quirk, Too


But that’s just the secondary market; what about the primary market for bills, which in many ways is more important? As discussed in more detail here, at bill auctions there’s a healthy sometimes majority demand coming from non-banks as much as dealers (indirect buyers in front end bill bidding isn’t from foreign participants, it’s instead these others such as hedge funds and the like).

This is where it gets even more interesting. At auctions, the high yields for the 4-week bill have been behaving, coming in right at 5 bps equivalent to the RRP (though median and low yields are less than it, so still the collateral bid). The next two bill maturities, the 8-week regular bill and the 42-day cash management bill (CMB), in the past few auctions they’ve priced to yield less than both the RRP and the 4-week!

It isn’t immediately apparent why this would be, and this is a relatively new development (you can see above the hierarchy in yields “behaved” up until recently). While we can’t say for certain, we can reasonably speculate that the market desire for slightly longer maturity bills is indicative of equally reasonable lowered appetite for a 4-week instrument that has to be rebid every month (higher uncertainty as to availability?)

Given the dearth of bills, collateral constraint, better to overpay for even slightly longer-dated instruments (regardless if that additional maturity is just 2 or 4 more weeks).

So, primary market still shows collateral pressures even if they’ve attained another one of these monetary quirks that otherwise shouldn’t be there in a world oversaturated with useful money.

The RRP, I believe, has shown itself even more closely associated to collateral circumstances than it had before last quarter’s end, while collateral circumstances have shown themselves to be on the one hand a little bit lessened in July while on the other a bit more screwed up. How does that balance out in the overall scheme of things?

Maybe that’s where LT UST yields and global bond behavior all comes in. For one thing, these things really shouldn’t be happening, certainly not if too much money really was the global monetary system’s biggest problem at the moment. It so isn’t.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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