Connect with us

News

Is a repeat of the 2019 repo crisis brewing?

Published

on

Is a repeat of the 2019 repo crisis brewing?

Unlock the Editor’s Digest for free

At the end of September there was a big spike in the Secured Overnight Financing Rate. This may already be putting you to sleep but it’s potentially a big deal, so please stick around.

SOFR was created to replace Libor (R.I.P.). It measures the cost of borrowing cash overnight, collateralised with US Treasuries, using actual transactions as opposed to Libor’s more manipulation-prone vibes. You can think of it as a proxy of how tight money is at any given time.

Here you can see how SOFR generally traded around the central point of the Federal Reserve’s interest rate corridor, and fell when the Fed cut rates by 50 basis points in September. But on the last day of the month, it suddenly spiked.

Advertisement

This is natural, to an extent. There’s often a bit of money tightness around the end of the quarters, and especially the end of the year, as banks are keen to look as lean as possible heading into reporting dates. So SOFR (and other measures of funding costs) will often spike a little around then.

But this was FAR bigger than normal. Here is the same chart but showing the end-of-2023 spike, and little dimples at the end of the first and second quarters.

Indeed, Bank of America’s Mark Cabana estimates that this was the single-biggest SOFR spike since Covid-19 wracked markets in early 2020, and points out it happened on record trading volumes.

Cabana says he was initially too hasty in dismissing the spike as driven by a short-term collateral shortage and unusually large amounts of window-dressing by banks. In a note published yesterday, he admits to overlooking something potentially more ominous: reserves seeping out of the banking system.

We have long believed funding markets are determined by 3 key fundamentals: cash, collateral, & dealer sheet capacity. We attributed last week’s funding spike to the latter 2 factors. We overlooked extent of cash drain in contributing to the pressure.

The increased sensitivity of cash to SOFR hints of LCLOR.

LCLOR stands for “lowest comfortable level of reserves”, and might require a bit more explanation.

Back in ye olde times (pre 2008), the Fed set rates by managing the amount of reserves sloshing around the US monetary system. But since 2008 that has been impossible due to the amount of money pumped in through various quantitative easing programmes. That has forced the Fed to use new tools — like interest on overnight reserves — to manage rates in what economists call the “abundant reserve regime”.

Advertisement

But the Fed has now been engaging in reverse-QE — or “quantitative tightening” — by shrinking its balance sheet sharply since 2022.

The goal is not to get the balance sheet back to pre-2008 levels. The US economy and financial system is far larger than it was then, and the new monetary tools have worked well.

The Fed just wants to get from an “abundant” reserve regime to an “ample” or “comfortable” one. The problem is that no one really knows exactly when that happens.

As Cabana writes (with FT Alphaville’s emphasis in bold below):

Like the macro neutral rate, LCLOR is only observed near to or after it is reached. We have long believed LCLOR is around $3-3.25tn given (1) bank willingness to compete for large time deposits (2) reserve / GDP metrics. Recent funding vol supports this.

A similar dynamic was seen in ‘19. At that time, the correlation of changes in reserves to SOFR-IORB turned similarly negative. The sensitivity of SOFR to reserves correlation signalled nearing LCLOR. We sense a similar dynamic is present today.

Unfortunately, when reserve levels drop to uncomfortable levels, we tend to find out very quickly, in unpleasant ways.

Advertisement

Cabana’s mention of 2019 is a reference to a repo market crisis in September that year, when the Fed missed growing hints of tightness in money markets. Eventually it forced the Federal Reserve to inject billions of dollars back into the system to prevent a broader calamity. MainFT wrote a superb explainer of the event, which you can read here.

In other words, the recent SOFR spike could be a hint that we are approaching or already in uncomfortable reserve levels, which could cause a repeat of the September 2019 repo ructions if the Fed doesn’t act preemptively to soothe stresses.

Here are Cabana’s conclusions (his emphasis):

Repo is heart of markets. EKG measures heart rate & rhythm. Repo EKG flags shift. Cash drain has supported spike in repo. Fed should take repo pulse & sense shift. If Fed too late to diagnose, ‘19 repeat. Bottom line: stay short spreads w/Fed behind on diagnosis.

Continue Reading
Advertisement
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

News

Cross-Tabs: October 2024 Times/Siena Poll of the Likely Electorate in Montana

Published

on

Cross-Tabs: October 2024 Times/Siena Poll of the Likely Electorate in Montana

How This Poll Was Conducted

Here are the key things to know about this poll:

• Interviewers spoke with 656 voters in Montana from Oct. 5 to 8.

• Times/Siena polls are conducted by telephone, using live interviewers, in both English and Spanish. Overall, about 97 percent of respondents were contacted on a cellphone for these polls.

• Voters are selected for the survey from a list of registered voters. The list contains information on the demographic characteristics of every registered voter, allowing us to make sure we reach the right number of voters of each party, race and region. For this poll, interviewers placed nearly 55,000 calls to nearly 30,000 voters.

Advertisement

• To further ensure that the results reflect the entire voting population, not just those willing to take a poll, we give more weight to respondents from demographic groups that are underrepresented among survey respondents, like people without a college degree. You can see more information about the characteristics of our respondents and the weighted sample at the bottom of the page, under “Composition of the Sample.”

• The margin of sampling error among likely voters is about plus or minus four percentage points. In theory, this means that the results should reflect the views of the overall population most of the time, though many other challenges create additional sources of error. When the difference between two values is computed — such as a candidate’s lead in a race — the margin of error is twice as large.

If you want to read more about how and why the Times/Siena Poll is conducted, you can see answers to frequently asked questions and submit your own questions here.

Full Methodology

Advertisement

The New York Times/Siena College poll of 656 voters in Montana was conducted in English on cellular and landline telephones from Oct. 5 to 8.

The margin of sampling error among the likely electorate is plus or minus 4.3 percentage points.

Sample

The survey is a response-rate-adjusted stratified sample of registered voters taken from the voter file maintained by L2, a nonpartisan voter-file vendor, and supplemented with additional voter-file-matched cellular telephone numbers from Marketing Systems Group. The sample was selected by The New York Times in multiple steps to account for differential telephone coverage, nonresponse and significant variation in the productivity of telephone numbers by state.

To adjust for noncoverage bias, the L2 voter file for each state was stratified by statehouse district, party, race, gender, marital status, household size, turnout history, age and homeownership. The proportion of registrants with a telephone number and the mean expected response rate were calculated for each stratum. The mean expected response rate was based on a model of unit nonresponse in prior Times/Siena surveys. The initial selection weight was equal to the reciprocal of a stratum’s mean telephone coverage and modeled response rate. For respondents with multiple telephone numbers on the L2 file, or with differing numbers from L2 and Marketing Systems Group, the number with the highest modeled response rate was selected.

Advertisement

Fielding

The sample was stratified according to political party, race and region. Marketing Systems Group screened the sample to ensure that the cellular telephone numbers were active, and the Siena College Research Institute fielded the poll, with additional fieldwork by ReconMR, the Public Opinion Research Laboratory at the University of North Florida, the Institute for Policy and Opinion Research at Roanoke College, the Center for Public Opinion and Policy Research at Winthrop University in South Carolina and the Survey Center at University of New Hampshire. Interviewers asked for the person named on the voter file and ended the interview if the intended respondent was not available. Overall, 97 percent of respondents were reached on a cellular telephone.

An interview was determined to be complete for the purposes of inclusion in the questions about whom the respondent would vote for if the respondent did not drop out of the survey after being asked the two self-reported variables used in weighting — age and education — and answered at least one of the questions about age, education or presidential-election candidate preference.

Weighting (registered voters)

The survey was weighted by The Times using the survey package in R in multiple steps.

Advertisement

First, the sample was adjusted for unequal probability of selection by stratum.

Second, each poll was weighted to match voter file-based parameters for the characteristics of registered voters.

The following targets were used:

• Six categories of partisanship (Classification based on an NYT model of vote choice in prior Times/Siena polls)

• Partisanship (L2 model based on commercial data and partisan political contributions)

Advertisement

• Race or ethnicity (L2 model)

• Age (self-reported age, or voter-file age if the respondent refused) by gender (L2 data)

• Education (four categories of self-reported education level, weighted to match NYT-based targets derived from Times/Siena polls, census data and the L2 voter file)

• White/nonwhite race by college or noncollege educational attainment (L2 model of race weighted to match NYT-based targets for self-reported education), if part of the non-Black-or-Hispanic sample

• Marital status (L2 model)

Advertisement

• Homeownership (L2 model)

• Turnout history (NYT classifications based on L2 data)

• Method of voting in the 2020 elections (NYT classifications based on L2 data)

• State region (NYT classifications)

• Census block group density (A.C.S. 5-Year Census Block Group data)

Advertisement

Finally, the sample of respondents who completed all questions in the survey was weighted identically as well as to the result for the general-election horse-race question (including voters leaning a certain way) on the full sample.

Weighting (likely electorate)

The survey was weighted by The Times using the R survey package in multiple steps.

First, the samples were adjusted for unequal probability of selection by stratum.

Second, the first-stage weight was adjusted to account for the probability that a registrant would vote in the 2024 election, based on a model of turnout in the 2020 election.

Advertisement

Third, the sample was weighted to match targets for the composition of the likely electorate. The targets for the composition of the likely electorate were derived by aggregating the individual-level turnout estimates described in the previous step for registrants on the L2 voter file. The categories used in weighting were the same as those previously mentioned for registered voters.

Fourth, the initial likely electorate weight was adjusted to incorporate self-reported intention to vote. Four-fifths of the final probability that a registrant would vote in the 2024 election was based on the registrant’s ex ante modeled turnout score, and one-fifth was based on self-reported intentions, based on prior Times/Siena polls, including a penalty to account for the tendency of survey respondents to turn out at higher rates than nonrespondents. The final likely electorate weight was equal to the modeled electorate rake weight, multiplied by the final turnout probability and divided by the ex ante modeled turnout probability.

Finally, the sample of respondents who completed all questions in the survey was weighted identically as well as to the result for the general election horse-race question (including leaners) on the full sample.

The margin of error accounts for the survey’s design effect, a measure of the loss of statistical power due to survey design and weighting.

The design effect for the full sample is 1.24 for the likely electorate in Montana.

Advertisement

Among registered voters, the margin of sampling error is plus or minus 4.3 points in Montana, including a design effect of 1.26.

For the sample of completed interviews, among the likely electorate, the margin of sampling error is plus or minus 4.5 points in Montana, including a design effect of 1.29.

Historically, The Times/Siena Poll’s error at the 95th percentile has been plus or minus 5.1 percentage points in surveys taken over the final three weeks before an election. Real-world error includes sources of error beyond sampling error, such as nonresponse bias, coverage error, late shifts among undecided voters and error in estimating the composition of the electorate.

Advertisement
Continue Reading

News

Some students are fighting to stay in college after the FAFSA delayed financial aid

Published

on

Some students are fighting to stay in college after the FAFSA delayed financial aid

In 2020, Congress voted to overhaul the FAFSA, seen here in its old, paper form. The federal application’s relaunch, in late 2023, came with a whole host of problems.

Richard Stephen/Getty Images/iStockphoto


hide caption

toggle caption

Advertisement

Richard Stephen/Getty Images/iStockphoto

Brenda H. almost didn’t make it to her first day of college. She tried to apply for financial aid through the Free Application for Federal Student Aid (FAFSA) four times, but encountered glitch after glitch – including a widespread bug that impacted students whose parents or spouses don’t have Social Security numbers. Brenda’s parents are both undocumented, which is why Brenda requested we keep their last name out of this story.

It wasn’t until her fifth attempt this spring that Brenda was finally able to submit her FAFSA. The delay meant she committed to a college – California State University, Northridge – without knowing if she could afford it.

“I was entering college blind,” she says as she thinks back to that decision.

Advertisement

When her financial aid package finally came, she says she was speechless. “My mouth dropped to the floor.” There were only a few weeks left before school started, and her award offer was much lower than she had planned for. “I was mad at FAFSA,” she says. “So I went in blind, I went in confused, and I went in angry.”

The FAFSA debacle has followed students like Brenda into the school year, as the repercussions of months-long delays from the last financial aid cycle continue to play out. Many colleges traditionally ask students to commit to their school by May 1, but the National College Attainment Network estimated that, compared to last year, about 408,000 fewer high school seniors had successfully completed their FAFSA as of that week. Some colleges responded by pushing their commitment deadlines, but the delays still left Brenda, and others like her, forced to make all kinds of decisions about college without knowing how they would pay for it. Now, many of those students are fighting to stay in school.

For Brenda, that meant scrambling to find housing nearby – a room that’s a 30-minute bus ride from campus – and making her own lunches to save money. She’s hoping to get more aid out of the next FAFSA cycle, which has again been delayed.

The U.S. Department of Education began testing this year’s form with a limited number of students on Oct. 1, the form’s traditional release date. The agency says it’s working to fix glitches and release the application to all students by Dec. 1.

“I’m wondering how I’m going to pay for the next semester”

Brenda’s mom is a seamstress and her dad works for a bulk spice market. Nobody in her family has ever been to college, so she didn’t grow up thinking she’d get a degree.

Advertisement

That changed in 11th grade, when Brenda started taking drum lessons in the basement of a local nonprofit in Downtown Los Angeles. Kid City Hope Place serves low-income students with educational programs, financial aid help and activities meant to get them excited about higher education.

“I remember I was so scared of the upstairs kids because they were all about college, all about [their] future. And back in junior year, I didn’t even think I would go to college,” Brenda says.

Kim Fabian, the project director at Kid City, jokes that their music program is just a way to draw kids to the college access program upstairs. “It actually is one of the tactics we use for some of the students who might fall between the cracks – the students that aren’t high achieving, but aren’t low achieving, and they get stuck somewhere in the middle. They just need a gentle push.”

That was the case for Brenda, who says, “I just didn’t see a future for myself. But once I started going to the [college access] program at the end of my junior year, they encouraged me to apply to college, and encouraged me to apply for the FAFSA. They encouraged me to just go for it. Like, ‘You won’t regret this.’ ”

Brenda’s counselors told her that because her family was low-income, she would likely qualify for substantial financial aid. Excited about the prospect of going to a four-year university, Brenda forged ahead and applied to colleges last fall, and then to the FAFSA.

Advertisement

Fabian says she didn’t know what to say earlier this year when the FAFSA application process failed every single Kid City family who applied. “It felt like a broken promise,” she says. “It was impossible to not feel that guilty feeling because we’re the intermediaries that are supposed to make these dreams happen, make this possible, give you a hand, talk you through the process.”

Even though the delays caused Brenda anxiety, she felt better when she saw her friends from higher-income families receive enough aid to cover their education. She was certain the same would be true for her. But when Brenda’s financial aid offer finally came in July, just a few weeks before school was set to begin, “I completely panicked,” she says.

She received a Pell Grant for $970 per semester, and was offered $2,750 in federal student loans each semester. That aid amount just about covers her tuition, but she’s on her own when it comes to housing, food, books and transportation.

And while Brenda did manage to cobble together enough money to start classes in the fall, she says the financial stress has made it hard to focus on her actual education.

“It makes me think about my future … and sometimes I’ll catch myself not focusing in class because I’m wondering how I’m going to pay for the next semester.”

Advertisement

Not just an application, but a gateway to “a life plan”

Brenda is majoring in psychology. She has struggled with her own mental health and couldn’t get the help she needed, so she wants to become a therapist to help kids like her. But she’s worried about whether she can afford to finish her degree.

Brenda says this whole experience made her realize that, for her, the FAFSA isn’t just a bureaucratic application that results in a sum of money – it’s a gateway to “a life-plan.” Had she gotten her aid package in a timely manner, she could have made a more informed decision about college, applied to scholarships and maybe the entire thing would have been less stressful.

“This whole process, everything I experienced, just traumatized me.”

She says it was frustrating to hear the form was delayed again this year, but every time she feels discouraged about paying for her education, she thinks about her 2- and 3-year-old nieces.

“I want to be a role model for them. I want them to know, ‘You can go to college. You’re not bound to be like your parents, you’re not bound to be like your grandparents. You can go to college and make a name for yourself.’ ”

Advertisement

As she waits to apply to the next FAFSA, she’s trying to stay focused on her coursework, and on her newfound independence. Recently, she stayed out past midnight for the first time, and had her first sleepover.

“I was like ‘Wow! I feel so independent. I feel so adult.’ I’ve been experiencing a lot more in college than I did in the past 17 years of my life.”

Now, Brenda hopes she can keep having those new life experiences. But it’ll depend on whether she can afford to keep getting the education she never even dreamed of.

Continue Reading

News

Hurricane Milton makes landfall in Florida

Published

on

Hurricane Milton makes landfall in Florida

Unlock the Editor’s Digest for free

Hurricane Milton made landfall on Florida’s highly populated western coast on Wednesday evening, bringing life-threatening flooding and extreme winds to the state for the second time in two weeks.

The cyclone made landfall near Siesta Key in Sarasota County as a category three storm with winds of 120mph, the US National Hurricane Center said. It is forecast to remain at hurricane strength while it moves across central Florida on Thursday.

The NHC warned of “life-threatening” gusts, tornadoes and storm surges of up to 13ft.

Advertisement

The head of the US Federal Emergency Management Agency, Deanne Criswell, on Wednesday said Milton would be a “deadly and catastrophic storm” bringing “massive storm surge, high winds and severe flooding” to Florida.

Milton is the second major hurricane to hit the US in a fortnight. It comes after Hurricane Helene wreaked havoc across several south-eastern states, killing more than 225 people and destroying roads across western North Carolina.

Hurricane Milton could trigger insurance losses of up to $60bn, with analysts warning the US’s 2024 hurricane season will “dent” insurers’ profitability.

Credit rating agency Morningstar DBRS warned that accumulation of losses over the 2024 hurricane season, which runs until the end of November, would “likely make a dent in insurers’ profitability”, particularly for those with “significant exposures to personal lines in Florida”.

While south-east Florida has long been seen as a high-risk area for hurricanes, insurers considered the northern part of the state as a more attractive place to write policies, said Oscar Seikaly, chief executive of NSI Insurance, a Miami-based group.

Advertisement

“Insurers have been balancing their business by writing lots of policies up north, which historically was pretty safe — until recently,” he said.

Seikaly added the potential damage in the area, where many houses are not built to withstand major storm events, could be severe. “There are still frame houses and those are the ones that fly if you have a tropical storm,” he said.

Before Milton made landfall, Florida governor Ron DeSantis said 6,000 members of the Florida National Guard and 3,000 from other states were standing ready to respond to its aftermath.

“This is the largest Florida National Guard search and rescue mobilisation in the entire history of the state of Florida,” he told reporters on Wednesday.

President Joe Biden on Wednesday criticised Republican presidential candidate Donald Trump for leading an “onslaught of lies” about the US government’s response to the storm.

Advertisement

Trump has sought to politicise both Hurricane Helene and Hurricane Milton by accusing the Biden administration of not doing enough to help communities hit by the storms. He has also spread false information about the amount of financial aid available to people fleeing disaster areas.

“For the last few weeks, there’s been a reckless, irresponsible and relentless promotion of disinformation and outright lies that are disturbing people,” said Biden. “It’s undermining confidence in the incredible rescue and recovery work that has already been taken and will continue to be taken. It’s harmful to those who need help the most.”

People arriving to shelter at a school ahead of Hurricane Miton’s expected landfall in Florida, US on October 9 2024
Evacuees arriving to shelter at a school in Bradenton, Florida © AFP via Getty Images
Flood protection barriers outside Tampa hospital in Florida, US on October 9 2024
Flood protection barriers outside a Tampa hospital © Reuters

In the Tampa Bay area, officials sent text messages and called people to warn them of the dangers of failing to evacuate their homes. In Pinellas County, which sits on the peninsula that forms Tampa Bay, officials warned people to “get out now”.

An independent group of climate scientists said human-caused climate change had boosted Hurricane Helene’s devastating rainfall by about 10 per cent and intensified its winds by about 11 per cent.

Global warming from the burning of fossil fuels had made the high sea temperatures that fuelled the storm 200 to 500 times more likely, the World Weather Attribution group found in a new report.

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here.

Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here

Advertisement
Continue Reading

Trending