Global Monitoring Report on NBFI
Doug Nolan
Seems ominous. The Bank of Japan’s Friday 25 bps rate hike was widely expected.
Yet 10-year JGB yields still jumped five bps to 2.02%, the high all the way back to February 17, 1999.
It’s worth noting that Japan’s government debt-to-GDP ratio surged from 130% in 1999 to 221% (3/31/25).
Curiously, the yen sank 1.4% on Friday’s “tightening”, the low versus the dollar back to January 14th.
December 19 – Financial Times (Leo Lewis):
“Japan’s benchmark government bond yields hit their highest level since 1999 after the central bank pushed up short-term interest rates to address rising prices and wages.
The Bank of Japan raised its policy rate by 0.25 percentage points to ‘around 0.75%’, a three-decade high, and signalled its readiness to continue monetary tightening if conditions are right.
The rate increase, a unanimous decision by the bank’s Policy Board, was the fourth under governor Kazuo Ueda, continuing a ‘normalisation’ process he launched last year.
The rate is the highest since 1995 as Japan emerges from decades when it maintained an ultra-loose monetary policy to try to fight deflation. Despite the prospect of further rate increases, the yen weakened against the dollar following the BoJ’s move.”
The yen closed the week less than 3% from July 2024’s multi-decade low (161.69) vs. the dollar (7/2/86) – during a period of yen devaluation following the September 1985 Plaza Accord.
December 15 – Bloomberg (Erica Yokoyama):
“Japan’s finance minister sent a warning to speculators after the yen clearly weakened against the dollar, following the Bank of Japan’s rate hike decision...
‘I’m seeing one-sided and rapid FX movements over the course of half a day, or even within just a few hours, and I am deeply concerned,’ Finance Minister Satsuki Katayama told…
‘We will take appropriate responses against excessive currency movements, based on the US-Japan joint statement in September,’ she said.”
We’ll assume Finance Minister Katayama is only more concerned now than when she elevated her market warning in November, with the addition of “deeply concerned.”
In the past, markets had a proclivity for testing government resolve to expend reserve holdings for often futile currency support operations.
With formidable international reserves, threats from Japan’s Ministry of Finance command market attention.
But the power of policymakers threats operates under the laws of diminishing returns.
It’s when governments are compelled to walk the walk that things tend to turn interesting: how much are they willing to spend, and will it be enough?
Show time.
For the week, JGB yields jumped seven bps (to 2.02%).
Again Friday, JGBs pulled global bond yields higher.
German 10-year yields rose five bps Friday to 2.90% - the high since October 19th, 2023 – and within seven bps of the high back to July 2011.
Meanwhile, German 30-year yields jumped seven bps to 3.55%, to the highest level since July 21, 2011.
French 10-year yields rose four bps to 3.61%, the high since November 25th, 2011.
French long bond (30yr) yields surged seven bps Friday to 4.52% – exceeding even the November 2011 European bond crisis spike, to the highest yield since June 10, 2009 (market nervousness on heavy global government debt issuance).
Treasury yields ended the week four bps lower at 4.15%, with yields declining three bps on Thursday’s weaker-than-expected November (“Swiss cheese”) CPI report.
December 19 – Wall Street Journal (Matt Grossman):
“New York Fed President John Williams said Thursday’s… inflation report was likely distorted by technical factors, echoing a chorus of economists and confirming the central bank will be eager for further data ahead of its late January policy meeting…
Before its next meeting, the Fed will get a look at December inflation data.
With those figures, ‘I think we’ll get a better reading of how big that distortion - how big the effect was,’ Williams said.”
Year-end trading dynamics tend to muddle the analysis.
With upward pressure on Japanese and global yields, it will be curious to gauge the Treasury market mood come January.
I’ll assume the $1,776 “warrior dividend” is the opening salvo in midterm vote harvesting efforts.
And I’ll stick with the analysis that so long as financial conditions remain so loose, surprises will be weighted to the upside for both growth and inflation.
It’s reasonable to assume the Fed is on hold so long as markets hold “risk off” at bay (increasingly no easy feat).
December 19 – Bloomberg (Rita Nazareth):
“The last stretch of a busy week for markets saw stocks climbing while traders faced the expiration of a record pile of options that threatened to amplify price swings.
Bitcoin jumped.
Bonds fell.
A rally in several tech names that have been under scrutiny over their ambitious artificial-intelligence spending plans lifted equities…
Nvidia Corp. led gains in megacaps.
Oracle Corp. surged about 6.5%. More than 26 billion shares changed hands on US exchanges, about 50% above the 12-month average.
Volume spiked amid a quarterly event known as triple witching — in which derivatives contracts tied to stocks, index options and futures mature.
Citigroup Inc. estimated that $7.1 trillion of notional open interest would expire.”
Through the fog of year-end trading muddle, warnings of de-risking/deleveraging continue to flicker.
Friday’s $2,200 rally cut bitcoin’s loss for the week to $2,550 (2.8%).
Trading down to $84,413 late on Thursday, things were looking dicey.
And speaking of “dicey,” the MAG7 index was down 2.1% in Wednesday’s session to a three-week low.
Telsa dropped 4.6%, Nvidia 3.8%, and Alphabet 3.2%. Stocks rallied sharply in Thursday/Friday trading.
Oracle’s 5.4% Wednesday slump to a six-month low really had the market on edge.
At Thursday’s close, the stock was down 45% from the September 22nd close.
Oracle CDS gained six Wednesday to 156 bps, the high since 2009 - and up from the 57 bps level where it began Q4 (closed week at 145).
December 17 – Financial Times (Tabby Kinder and Rafe Rosner-Uddin):
“Oracle’s largest data centre partner Blue Owl Capital will not back a $10bn deal for its next facility, as the software group faces increased concerns about its rising debt and artificial intelligence spending.
Blue Owl had been in discussions with lenders and Oracle about investing in the planned 1 gigawatt data centre being built to serve OpenAI in Saline Township, Michigan.
But the agreement will not go forward after negotiations stalled…
The private capital group has been the primary backer for Oracle’s largest data centre projects in the US, investing its own money and raising billions more in debt to build the facilities.
Blue Owl typically sets up a special purpose vehicle, which owns the data centre and leases it to Oracle.”
December 15 – Reuters (Niket Nishant):
“The AI spending boom is entering a ‘dangerous’ phase as Big Tech firms increasingly tap external investors to cover mounting costs, a top executive at hedge fund giant Bridgewater Associates said…
The warning underscores the degree of unease rippling through markets as several investors have begun to question the sustainability of massive capital spending on AI.
While the technology has deeply permeated the economy, critics are beginning to wonder how severe the fallout could be if the boom fails to translate into tangible profits.
‘Going forward, there is a reasonable probability that we will soon find ourselves in a bubble,’ Bridgewater’s Co-Chief Investment Officer Greg Jensen wrote…
With costs rising beyond what internal cash flows can support, companies are turning to outside sources of funding to pursue their ambitions.”
“The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system.”
Coordinating national financial authorities on an international level, the FSB’s mission is to promote financial stability.
With the Bank of England’s Andrew Bailey as chair, the organization is comprised of leading global central bankers and finance officials.
The FSB is the latest major regulatory body to highlight mounting systemic risks, this week with the timely publication of its “Global Monitoring Report on Nonbank Financial Intermediation 2025.”
This exceptional report’s 87 pages are full of pertinent data, tables, charts, and informative narrative.
While failing to do anything about it, global officials have at least made commendable headway in compiling and monitoring financial excess.
December 15 – Financial Times (Martin Arnold):
“The value of assets held by insurers, private credit providers, hedge funds and other non-bank financial groups grew at more than double the rate of those in the banking sector last year as concerns grow about the opacity and potential risks posed by the sector.
The assets of these non-bank groups rose in value by 9.4% to $256.8tn in 2024, meaning they accounted for more than half of global financial assets for the first time since the Covid-19 pandemic…
By contrast, the value of heavily regulated banks’ assets rose 4.7% to just over $191tn in 2024, the Financial Stability Board said.
The figures come as supervisors grow increasingly concerned about the opacity and potential risks non-bank groups could present, as well as their links back to the traditional banking system.”
December 15 – Bloomberg (Laura Noonan):
“Global assets in the sprawling shadow banking sector have crossed the $250 trillion mark for the first time…, fueling fears of mounting systemic risks from less regulated corners of the financial sector.
The FSB’s annual global financial monitor shows non bank financial institutions — a group that spans hedge funds, insurers, investment funds and others — had a record $256.8 trillion of assets at the end of 2024…
The group now accounts for 51% of total financial assets…
Within non banks, the fastest growth was in trust companies, hedge funds, money market funds and other investment funds, which all posted double digit rates of growth…”
Short of time for a comprehensive review, I’ve extracted a few passages:
“Hedge fund assets increased 19.2% globally, and the increase in Cayman Islands hedge fund assets accounted for 90.7% of the aggregate increase.
This increase occurred despite the number of hedge funds in the Cayman Islands decreasing, and reflected changes in investment types, notably a significant increase in investments in master funds.”
“Bank financing of offshore hedge funds or private credit funds, for instance, can be systemically significant yet remain outside standard sectoral statistics.”
“…Recent analysis for the United States highlights a gap between U.S. Treasury International Capital data on hedge fund holdings of U.S. Treasuries, which could only be identified by combining various data sources.
The analysis found that hedge fund positions appear increasingly concentrated offshore in the Cayman Islands.”
“…Regulatory data may contain gaps if non-domestic subsidiaries or branches providing prime brokerage services abroad are not captured by domestic reporting requirements.
Commercial data based on voluntary reporting may be incomplete and lack robust quality assurance.”
“Regulatory data on private markets, such as private equity, private credit, and hedge funds, remain incomplete in several jurisdictions.
Significant cross-border data blind spots persist, as exposures of domestic banks to foreign hedge funds, private credit funds, or offshore affiliates are frequently excluded from local reporting frameworks or available only in aggregated form.
Some authorities note that derivatives, repo, and other securities financing transactions involving non-resident entities are only partially captured due to limitations in regulatory scope.
Jurisdictions hosting large international financial centres also highlight that many domestic entities are managed from abroad, limiting access to transactional or counterparty-level data.
In addition, regulatory and operational fragmentation, such as derivatives trades being cleared or reported in other jurisdictions, creates further challenges in tracing exposures and identifying foreign counterparties.”
EF1 [$58 TN of “collective investment vehicles with features that make them susceptible to runs”] growth rates above 20% were experienced in several advanced economies (Hong Kong, Italy, and the Cayman Islands) and emerging market economies (Chile, China and Mexico)…
Hong Kong registered a 47.4% increase, driven by net MMF inflows…
Italy’s growth of 20.2% was mainly driven by inflows into fixed income funds…
Chile’s 26.1% growth was driven by inflows…
Mexico’s 20.1% growth was driven by inflows into fixed income funds…
The United States continued to account for the largest share of EF1, followed by the Cayman Islands, China, Luxembourg, and Ireland – together accounting for 79.0% of EF1 assets.”
“Annex 4: Main development per major NBFI subsectors” was especially informative.
By subsectors, Insurance Corporations expanded 6.0% y-o-y – with AEs/Advanced Economies growth of 6.0% vs EME/Emerging Market Economies at 13.8% - to $38.9 TN.
Pension Funds grew 6.9% y-o-y (AEs 6.6%; EMEs 15.9%) to $44.1 TN; Finance Companies 5.7% (4.5%; 12.0%) to $7.5 TN; Broker/Dealers 2.9% (2.8%; 4.3%) to $12.7 TN; and Structured Finance 6.7% (6.1%; 38.9%) to $6.5 TN.
Solid growth, but nothing all that earth shattering.
Things get more interesting, however, with MMFs/Money Market Funds, Hedge Funds, Other Investment Funds, and Trust Companies.
These subsectors, central to the Bubble thesis, reveal growth true to major Bubble dynamics.
Global “MMFs” surged 15.0% y-o-y to $12.1 TN, with AEs growth at 13.6% and EMEs at 21.7%.
Hedge Funds surged 19.2% to $11.3 TN (AEs 14.2%; EMEs 18.5%).
Other Investment Funds (excluding MMFs, hedge funds, and REITs) expanded 14.5% y-o-y to $69.1 TN (AEs 14.2%; EMEs 18.5%).
And Trust Companies ballooned 20.8% to $4.9 TN (8.4%; 23.6%).
In this data, we see not only confirmation of the money market fund/hedge fund nexus as this cycle’s prevailing source of speculative leverage and market liquidity.
Data also confirms the thesis that this monetary inflation evolved into a powerful global phenomenon.
Amazingly, extraordinary growth in advanced economy securities finance is outstripped by bubbling emerging markets.
December 19 – Reuters (Chris Prentice and Marisa Taylor):
“Days after being sworn in as President Donald Trump’s appointee at a top U.S. housing agency, Bill Pulte began cleaning house.
Since taking over the Federal Housing Finance Agency in March, Pulte has driven out hundreds of employees from the mortgage regulator and Fannie Mae and Freddie Mac…
Pulte has supplanted industry veterans with politically or personally connected advisors, including a business partner of Trump’s eldest son and a former registered sex offender who campaigned for the Republican president…
‘This reliance on a buddy system – in which people are getting into positions because of their political or personal connections – is unprecedented at these organizations,’ said Richard Painter, a Bush administration ethics attorney who co-authored a book about ethical lapses in the banking industry and the 2008 crisis.
‘It’s a potentially explosive and dangerous situation that could be damaging not only to the mortgage industry but to our economy as a whole’.”
In federal conservatorship since 2008 - and these days regulated by Bill Pulte’s Federal Housing Finance Agency - Fannie Mae and Freddie Mac continue to fatten into only more powerful financial institutions.
Combined total assets (including guaranteed MBS) ended the third quarter at $7.804 TN.
I’ll be closely monitoring GSE activities as we head into next year’s midterms.
They’re certainly off to a forceful start.
In the four months, July through October, Fannie’s retained mortgage portfolio (loans not sold to investors) surged $27.0 billion, or 32%, to $111.8 billion.
Freddie’s retained portfolio jumped $25.2 billion, or 26%, to $121.75 billion.
This places combined four-month retained portfolio growth at $52.2 billion, or 86% annualized.
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