Month in Cash: New easing goes down surprisingly well—so far

The big news last month, of course, was the Federal Reserve’s Federal Open Market Committee announcement of a new round of easing measures, this time focusing on mortgages, and a commitment to continue easing indefinitely. The market reaction, at least in the money market world, has been better than expected. Despite the announcement, there’s been no real drop-off in either supply or in overnight or term rates. We’re still seeing repo rates in the high teens or low 20s, and we’re seeing an ample amount of supply in both mortgages and Treasuries. It’s a surprising reaction, but nobody likes to look a gift horse in the mouth.

Of course, that doesn’t mean we won’t see repercussions. Neither event has taken place yet, but we do expect to see a general reduction in supply and lower rates, especially in the overnight marketplace, probably beginning this month. After all, the Fed is planning $40 billion per month in additional purchases of mortgages, a course change that has to leave a significant wake.

Do the Swiss have most-favored nations?
Another positive is on the municipal side, where rates on both daily and weekly variable rate demand notes (VRDNs) — short-term debt instruments that reset on a daily and weekly basis — have been slowly inching upward. That’s something we were predicting would happen. The strong showing by VRDNs is especially notable, coming in an environment in which overnight rates in the taxable market are doing well themselves.

Overseas, Standard & Poor’s potentially cast some light on the wide gap between borrowing rates in the eurozone. It said late in the month that the Swiss National Bank, in an effort to protect its currency against the euro, has been buying approximately 50 percent of the bonds issued by the stronger “core” European countries of Germany, France, Finland, the Netherlands and Austria, amounting to roughly 80 billion euro worth of bonds in the first seven months of 2012 alone. If true, that could be a contributing factor in the discrepancy between the low rates for those stronger core countries and the higher borrowing costs for less-stable European countries such as Spain and Italy. Switzerland’s central bank denied the rating agency’s charge, saying that S&P failed to take into account its sizable deposits outside of the core zone.