Fed ‘repo’ plan could face fund manager resistance

Large holders of US Treasury bills say they are reluctant to sell them to central bank

Joe Rennison in New York

FILE PHOTO: The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo
The Federal Reserve plans to buy $60bn in Treasury bills a month © Reuters

Money market funds that are among the largest holders of US Treasury bills say they are reluctant to sell them to the Federal Reserve, presenting an obstacle to the central bank as it seeks to increase the amount of cash in short-term lending markets.

The Fed announced last Friday that it would begin monthly purchases of roughly $60bn of Treasury bills, which have a maturity of less than 12 months, in an attempt to inject money into the financial system following a cash squeeze that sent overnight “repo” lending rates surging in September.

Many investors had expected the Fed to act but were surprised by the size of the planned purchases, with some questioning how the central bank would be able to buy the debt without pushing down yields in the $2.3tn market.

The problem facing managers of money market funds — which are permitted to buy assets with no more than 13 months to maturity — is that they would rather keep the Treasury bills now in their possession than sell them to the Fed and then go back into the market to buy debt with potentially lower yields.

“We are not going to sell them,” said Pia McCusker, global head of cash management at State Street Global Advisors, which holds more than $22bn of T-bills in its $350bn of money market funds. “It’s a short-term gain and then I would have to replace it with something else at a much lower rate.”

Money market funds are among the largest holders of Treasury bills, accounting for almost $550bn at the end of August, according to data from the Investment Company Institute.

Several fund managers told the Financial Times that they have no incentive to sell without a steep increase in prices — and a corresponding fall in yields.

“It makes us question where are they going to find these bills,” said John Tobin, global head of liquidity portfolio management at JPMorgan Asset Management, which holds $70bn of T-bills across its $545bn money market funds. “When the Fed is going to be a large, indiscriminate buyer in the front end, that is going to put pressure on yields.”

Money market fund managers have already been dealing with falling yields on Treasury bills.

The yield on a 12-month bill in April, for example, stood at 2.45 per cent.

That same security now has just six months left until it matures, and six-month bills currently yield just 1.66 per cent.

Market yields are expected to head even lower by the end of the year.

Futures markets are pricing in a 70 per cent probability for a cut in rates by the Fed when it meets at the end of this month.

One further complication is the lack of alternatives on offer for money market funds to buy, given that banks tend to step back from short-dated lending markets at the end of each quarter, in order to tidy up their balance sheets for reporting deadlines.

Data on the other large holders of Treasury bills are scant.

Official foreign investors like central banks hold about $280bn, according to the US Treasury.

Companies with big holdings of cash are also thought to be large investors.

The group of banks responsible for ensuring the smooth auction of US government debt hold just $7bn.

Deborah Cunningham, chief investment officer of global liquidity markets at Federated Investors, said these investors may have different priorities from money market funds and could be more willing to sell to the Fed, easing potential pressure in the market.

“What the Fed will have to pay and who they will have to deal with to get to the amount of bills they want is not certain at the moment,” she said. “They could have to offer some pretty high premiums in order to entice people to sell.”

The Conservative Party conference

Boris Johnson makes the EU an offer it can refuse

The prime minister’s long-awaited Brexit proposal seems unlikely to produce a deal. Yet another extension beckons

FOR WEEKS the European Union has complained that, even as the October 31st deadline for Britain to leave drew nearer, Boris Johnson’s new government was failing to offer clear proposals to amend Theresa May’s failed Brexit deal. All Mr Johnson would say was that the hated backstop, an arrangement to avert a hard border in Ireland by keeping the United Kingdom in a customs union, had to go.

This week, after a tub-thumping party conference speech in Manchester under the slogan “Get Brexit done”, Mr Johnson at last put forward his plan. Yet despite his labelling it a “fair and reasonable compromise”, it went down badly with the EU, which sees it as a breach of promises, not the basis for a new deal.

As expected, Mr Johnson’s proposal would keep Northern Ireland under the EU’s agri-food regulatory regime. He now wants to expand this to cover manufactured goods as well. But Great Britain would opt out of the rules, implying checks on goods moving between Northern Ireland and the mainland. And the plan would apply for only four years after the transition period ends in 2021, at which point the Northern Ireland Assembly would decide whether to remain aligned with the EU or adopt British rules.

Meanwhile, the whole UK would leave the customs union. This implies customs checks between Northern Ireland and the south—though Mr Johnson insists these could be automated and, when necessary, conducted away from the border. He also wants Northern Ireland out of the EU’s value-added-tax regime.

The plan was welcomed by Tory Brexiteers and, more importantly, by the Northern Irish Democratic Unionist Party, which supports the Tories in Parliament. Yet it has little appeal in Brussels or, critically, Dublin. EU governments see it as a big step back from undertakings given by Mrs May in December 2017 to maintain an open, frictionless border in Ireland, preserve the all-island economy and avoid new customs or border controls anywhere on the island.

They are unhappy about the proposed unilateral four-year time limit. And they do not believe that promises to use new technology, exemptions for small businesses and a system of trusted traders would be enough to avoid physical controls at or near the border.

British ministers were out in force this week selling the new plan as what one called a “landing zone” that could satisfy all sides. Mr Johnson suggested that, just as he had compromised, so it was now the EU’s turn. Some in Brussels were relieved that he did not say it was his final, “take it or leave it” offer, as initial reports had suggested.

A few even hoped it might be tweaked to include alignment on customs as well as on regulations, or to revert to a Northern Ireland-only backstop. Yet the signals from Downing Street suggest that the prime minister sees little scope for more compromise on his side.

His sales pitch to the EU ahead of the crucial European Council summit on October 17th and 18th rests on two arguments. The first is that only a deal close to his can ever pass in Parliament. For evidence, he cites the Brady amendment, a version of Mrs May’s Brexit deal that replaced the backstop, which MPs voted for in January.

The second is that, if the EU is unwilling to accept his plan, he will have no alternative but to leave with no deal on October 31st. And although that may be bad for Britain, it will also hurt the EU, especially Ireland.

Yet in Brussels neither argument seems convincing. The EU knows that Mr Johnson has no parliamentary majority. He cannot rely even on his own Tory MPs, since some of the more extreme hardliners prefer no-deal to anything else. This means he needs significant Labour backing to pass any deal. And although some Labour MPs share the Tories’ desire to “get Brexit done”, and many are nervous about no-deal, few are prepared to rescue a prime minister whom they mistrust as a populist popinjay.

As for no-deal, everyone is aware of Mr Johnson’s repeated promises to take Britain out of the EU on October 31st, “do or die”. His ministers loyally repeated this pledge in Manchester. Mr Johnson himself argued forcefully against any further dithering or delay.

Yet Brussels also understands the terms of the Benn Act that was passed by Parliament last month. This requires the prime minister to seek the agreement of the EU to a three-month extension of the deadline if, by October 19th, he has neither secured a deal nor won parliamentary approval for a no-deal Brexit.

January is the new October

Mr Johnson says he will obey the law, but he also insists that Britain will leave the EU on October 31st, whatever happens. These two positions are clearly in conflict. Hence a favourite parlour game at the Tory conference: to hunt for loopholes in what Mr Johnson likes to call the “Surrender Act”. Some suggest he might formally ask for an extension but secretly tell Brussels he does not want one.

Or he could invite other EU governments to refuse an extension, so as to exert more pressure on MPs to accept a deal. He might invoke an emergency under the Civil Contingencies Act, to suspend the law. Some ministers claimed there was a secret wheeze to get round the Benn Act, but that it was confidential.

Yet one of the act’s authors, Dominic Grieve, a former Tory attorney-general, insists its drafting is legally watertight. He characterises the suggested tricks to try to get round it as “far-fetched and reputationally catastrophic”. He and his supporters, who have a majority in Parliament, are ready to legislate again if need be. They would go to court at the slightest hint that Mr Johnson might flout their law. Some even talk of passing a “humble address” to invite the queen to sack her prime minister in such circumstances.

Any extension of the October 31st deadline would be a humiliation for the prime minister, which is why some suggest he should resign instead. Yet there could be ways to turn matters to his advantage. One idea is to attach a confirmatory referendum to some version of a Brexit deal, which might win over a majority of MPs.

But Mr Johnson is averse to the notion of a second vote. He would prefer a general election which, after being forced against his will to request an extension, he could fight under the banner of backing the people who voted to leave the EU against an establishment determined to stand in their way.

The obstacle to this is the 2011 Fixed-term Parliaments Act. This requires a two-thirds majority of MPs to vote in favour of any early dissolution of Parliament. The effect has been to give the Labour opposition a veto over the prime minister’s repeated calls for an early general election.

The irony that it was a Conservative-led government, under David Cameron, that passed this particular piece of legislation is surely not lost on Mr Johnson.

What Moscow Really Wants From Venezuela

Russia has both economic and domestic political reasons for supporting the Maduro government.

By Ekaterina Zolotova

Throughout Venezuela’s ongoing political crisis, Russia has been among its staunchest supporters. Last week, Venezuelan President Nicolas Maduro visited Russian President Vladimir Putin in Moscow, hoping for some reassurances of the Kremlin’s continued support for his administration amid the ongoing turmoil in his country and international pressure for him to step down.

In September, the United States imposed new sanctions (against four shipping companies registered in Cyprus and Panama) aimed at stopping Venezuelan oil exports headed for Cuba. The U.S. also promised last week to provide the Venezuelan opposition with $52 million in aid. The European Union, meanwhile, introduced sanctions against seven members of the Venezuelan security and intelligence forces. Russia, however, hasn’t wavered in its support for Venezuela. Indeed, Moscow has not only foreign policy reasons to maintain strong relations with Caracas but domestic ones, too.
The two countries are long-time allies, but their ties peaked around 2012. Moscow considered Venezuela among its main strategic partners, provided generous loans and supplied a wide range of goods. Several Russian companies were involved in the development of Venezuelan oil fields, Russian-made KAMAZ trucks were in wide supply, and Russia participated in a pro-government housing construction program in Venezuela.

But geopolitical tensions, as well as tough sanction policies against both Russia and Venezuela, significantly complicated Russia-Venezuela relations. High inflation and the risk of default in Venezuela also affected the willingness of Russian investors and exporters to do business with Venezuela and the ability of Venezuelan companies to sell their goods to foreign customers.

Nonetheless, the Kremlin has chosen to seek greater cooperation with Caracas for several reasons. First, from an economic perspective, Russia and Venezuela have much to gain from maintaining close ties. Both have large markets and production potential.


Trade between the two has fluctuated over the years, however. When it comes to oil, Russian companies of course have an interest in Venezuela – the country, after all, has the largest oil reserves in the world, exceeding 300 billion barrels, according to OPEC. Some Russian oil companies have therefore invested in the Venezuelan energy sector.

But in recent years, many Russian oil companies have left Venezuela, put off by the political uncertainty, security risks and general low quality of Venezuelan oil, not to mention the threat of sanctions. Yet a small group of companies, including Rosneft and Gazprom Neft, remains, despite U.S. threats to impose new penalties. In early September, for example, Washington said it was considering sanctions against Rosneft for its involvement in the Venezuelan oil sector; Rosneft, however, continues to purchase oil and develop fields in Venezuela.

Russia also sees Venezuela as a potential market for Russian wheat (wheat exports to Venezuela in 2018 increased by 33 percent year over year), mechanical engineering products and medical supplies. Such products could provide some relief from the scarcity issues plaguing Venezuela since the crisis began. For its part, Venezuela sees Russia as a potential buyer of its agricultural products. Russia already buys food products from other Latin American countries – these tend to be cheaper than Russian food products despite logistical costs and tariffs. In fact, Uruguay and Argentina account for 7 percent and 5 percent respectiely of Russian dairy imports. In addition, Argentina is the second-largest supplier of cheese to Russia after Belarus.
The Kremlin also has domestic political reasons for wanting to increase cooperation with Venezuela. It sees an opportunity to boost its approval rating by backing the Maduro government because Russian public opinion tends to be favorable toward Venezuela, and Latin America in general. A survey released in February by the Russian Public Opinion Research Center found that 57 percent of respondents were interested in current events in Venezuela.

It also found that 20 percent of Russians see the deteriorating political and economic situation in Venezuela as a result of actions by other countries, particularly the United States. When it comes to the Venezuelan opposition and anti-government protesters, 15 percent said they felt indifferent, 12 percent felt distrust and 11 percent condemned them.

Thus, if Moscow were to refuse to help Maduro, it might experience some backlash from the Russian public. Moreover, the amount of support Russia has provided – food supplies and a small number of troops for nonmilitary support – doesn’t carry a huge financial burden for Moscow anyway. Considering that it, too, has seen a recent wave of anti-government protests, it has been inclined to help Caracas in its time of need.

In addition, Russia has an interest in increasing its presence in the Western Hemisphere, in the United States’ own backyard. It has done so primarily by getting close to Cuba – given its proximity to the U.S. – a country the Russian prime minister is scheduled to visit later this week for the first time since 2013.
But maintaining strong relations with Venezuela could also help the Kremlin boost relations with Cuba. It has been difficult for Russia to gain a substantial foothold in Venezuela, partly because the U.S. would react strongly to any Russian military involvement in the country.
For this reason, not to mention the expense and logistical requirements, it’s extremely unlikely that Russia would set up a military base in Venezuela, but it did send roughly 100 troops there in March, and a group of Russian military personnel arrived in Venezuela a week ago to carry out maintenance on Russian-made equipment. 
Venezuela used to be one of the largest buyers of Russian weapons; it had purchased Russian tanks, Grad multiple rocket launchers, Pechora-2M missile systems, S-300 air defense systems and many others.      
But today, Venezuela is no longer considered a major market for Russian arms. In the past, these goods were purchased mainly using Russian loans, and Moscow can no longer rely on Caracas to pay back its debts given the state of its economy.
Moscow too is short on funds and reluctant to offer loans it can’t be sure will be paid back. Thus, Russia’s defense-related activity in Venezuela today is limited mostly to fulfilling old contracts and maintaining assets that have already been delivered under previous agreements.
 Russia has unquestionable long-term economic and geopolitical interests in Venezuela.
But its ability to increase its presence there is limited, in part by its own economic obstacles, which include falling oil prices, reduced federal budget revenue and deteriorating living conditions for the Russian people.
Still, Moscow will continue to make gestures of increased cooperation with an eye toward strengthening ties in the long term, not only because of the potential economic benefits but also because the Kremlin knows this is a popular policy position at home.

How to Ward Off the Next Recession

A decade after the Great Recession, Europe’s economy is still convalescing, and another period of prolonged hardship would cause serious, potentially dangerous economic and political damage. With monetary and fiscal policy unlikely to provide enough stimulus, policymakers should explore alternative options.

Jean Pisani-Ferry


WASHINGTON, DC – Despite confident official pronouncements, the deteriorating state of the global economy is high on the international policy agenda. The OECD recently revised down its forecast to 1.5% growth in the advanced G20 economies in 2020, compared to almost 2.5% in 2017. And its chief economist, Laurence Boone, warned of the risk of further deterioration – a coded way of indicating a growing threat of recession.

Structural shifts in the automobile industry, miserable productivity gains in advanced economies, shrinking spare capacity, and the build-up of financial fragilities would be sufficient causes for concern even in normal times. But, today, a combination of cracks in the global trading system and an unprecedented shortage of policy ammunition are adding to the worries.

As the OECD emphasized, a good part of the slowdown can be attributed to the ongoing Sino-American trade dispute. Chad Bown of the Peterson Institute reckons that, on the basis of announcements made, the average US tariff on imports from China will increase from 3% two years ago to 27% by the end of this year, while Chinese tariffs on US goods will rise from 8% to 25% over the same period. These are sharp enough increases to disrupt supply chains. Anxieties over a further escalation will inevitably dent investment.

Moreover, US President Donald Trump’s erratic tariff policy is symptomatic of a broader reassessment of global production networks. Even if Trump is not re-elected in 2020, there are hardly any free traders left in America. The damage to the global trade regime from rising nationalism is likely to outlast him. And climate-related grievances regarding the unfettered pursuit of lower production costs are bound to grow further.

The other big concern is the lack of policy tools to counter a slowdown. In a normal recession, central banks cut interest rates aggressively to prop up demand. The United States Federal Reserve, for example, lowered rates by five percentage points in each of the last three recessions.

Today, however, the Fed only has about half its normal room to cut rates, while the European Central Bank has very little. Risk-free rates in the eurozone are already negative, even on 30-year bonds. And after the ECB recently loosened policy under outgoing President Mario Draghi, his successor, Christine Lagarde, will inherit a largely empty toolbox.

As Lagarde has said, “central banks are not the only game in town.” Both she and Draghi have called on eurozone governments to provide more fiscal stimulus. On paper, this looks feasible: whereas the US cyclically-adjusted budget deficit exceeds 6% of GDP, the average deficit in the eurozone remains below 1%. And the debt-to-GDP ratio in the eurozone, though high, is lower than in the US. Furthermore, as former International Monetary Fund chief economist Olivier Blanchard has emphasized, temporary deficits do not imply a lasting increase in the debt-to-GDP ratio when the interest rate is well below the growth rate, as it is now.

European finance ministers, however, did not even consider contingent fiscal plans at their most recent meeting in September. And Germany, which has room to act, still opposes relaxing its “black zero” requirement, according to which parliament must approve a balanced budget, with deficits permissible only if growth undershoots expectations. While calls to lift this self-imposed constraint are growing louder, the separate “debt brake” enshrined in Germany’s constitution limits the cyclically-adjusted federal deficit to 0.35% of GDP.

Eurozone governments thus have only limited room for fiscal maneuver, and may lack the political courage to enlarge it. Most likely, therefore, Europe will muddle through with some recession-induced fiscal easing but no aggressive response.

Yet, a decade after the Great Recession, Europe’s economy is still convalescing, and another period of prolonged hardship would cause serious, potentially dangerous economic and political damage. Policymakers should therefore explore alternative options.

That brings us to the outlandish idea of equipping the ECB with new tools. In the late 1960s, Milton Friedman, the father of monetarism, imagined that a central bank could drop banknotes by helicopter – a metaphor that former Fed Chairman Ben Bernanke later used to explain how the Fed could always do more to counter deflation.

To turn this thought experiment into a real policy option, the Eurosystem could extend perpetual, interest-free loans to banks in member countries, on the condition that they pass the money on to consumers under the same terms. Concretely, households would receive a €1,000 ($1,094) credit that they would never pay back – in effect, a transfer that would finance more consumption. Each member country’s central bank would either keep a fictional asset on its balance sheet or, more realistically, recoup the corresponding losses over time by reducing the annual dividend paid to its public shareholder.

Such an initiative would face considerable obstacles, however. The first is legal: would the ECB be acting within its mandate? Arguably, it would, provided such an operation were used to help achieve the ECB’s price stability objective. Eurozone inflation is currently too low, and a recession would aggravate this.

The second problem is operational: some eurozone households have no bank account, while others have several. And should the same amount be extended to households in Luxembourg as in Latvia, where per capita income is four times lower? This may not matter from a macroeconomic standpoint, but it does in terms of equity.

The final hurdle is political: the ECB would be accused of breaching the Chinese wall separating monetary and fiscal policy, because the operation would be equivalent to a state-administered transfer financed by money creation. Given the current acrimony over the ECB’s monetary strategy, that might be one controversy too far.

Time will tell if a deteriorating economic situation and the lack of alternative options justify entering uncharted territory. It is unlikely that Europe will have the guts for it, and even if it does, the path will be perilously narrow and littered with obstacles. But the risk of acting might ultimately be lower than the risk of kicking the can down the road.

Jean Pisani-Ferry, a senior fellow at Bruegel, a Brussels-based think tank, holds the Tommaso Padoa-Schioppa chair at the European University Institute, and is a visiting fellow at the Peterson Institute in Washington, DC.

Chasing wealth managers is a risky business

Private banks are fighting to advise billionaires who want a lot for their money

John Gapper

web_Swiss wealth management

Zurich is a sober and orderly city, so a fierce altercation near the Swiss National Bank between a banker to the world’s billionaires and a private detective who was trailing him is worthy of John Le Carré. It is all the more lurid that Credit Suisse ordered surveillance of Iqbal Khan after he left abruptly for its rival UBS.

Credit Suisse was worried that Mr Khan, who led an expansion of wealth management there, could take valuable clients and colleagues with him. Cut to Germany, where Deutsche Bank is hoping to recruit several hundred “relationship managers” — financial advisers to the wealthy — to compete with Switzerland’s private banks.

Whenever banks get overexcited about a profitable and expanding area of finance and embark on an expensive talent war, it usually leads to trouble down the road. So it is a fair bet that there will be fallout from this battle over wealth management, the activity that includes private banking.

The stampede is understandable. Swiss private banks went through tough times after the 2008 financial crisis and a US crackdown on offshore tax evasion that led to banks including UBS being fined hundreds of millions and having to loosen traditional bank secrecy rules. But they never lost their grip on a business that many rivals envy.

Traditional retail banking has been less profitable in the era of low interest rates and digital insurgency. Investment banking has been squeezed by regulations and caused a lot of trouble at European banks, notably Deutsche. When boards of global banks gather for strategy days, it can get gloomy.

Wealth management feels like a profitable one-way bet, by comparison. It does not require much capital to advise clients on how to conserve and invest their wealth, and the returns on equity are high. The rise of billionaire entrepreneurs and the super-rich, particularly in China and the rest of Asia, keeps the market growing.

This makes private bankers, particularly relationship managers with clients they have served for years, desirable. It is hard for an institution without a long history in private banking to expand without hiring them from other banks — the rule of thumb at one Swiss bank is that one manager can advise clients with a total of $1bn in assets.

Hence the unruly scene on the streets of Zurich and the poaching of bankers that is occurring around the world. Boris Collardi, who led the expansion of Julius Baer as chief executive, is now heading a hiring drive at Pictet, including the appointment of Tee Fong-Seng as head of wealth management in Asia.

But as banks offer millions to lure private bankers with desirable clients, they should consider a few things.

First, a relationship manager may not bring clients with them. The personal touch helps: private banks advise clients not only on investments but on sensitive matters such as family succession and trusts. But the expertise (and credit rating) of the bank also counts: “Assets are sticky and they take time to transfer. Sometimes they do not come at all,” one Swiss banker says.

The danger is that the hiring war will prove an expensive zero-sum game in which costs grow faster than revenues. McKinsey & Co, the consultancy, this week sounded a warning that profits fell by 8 per cent at private banks in western Europe last year, as rising costs squeezed their margins.

Second, private banking to the emerging class of ultra-wealthy in Asia is not free of risk. Under Mr Khan, Credit Suisse targeted Asia entrepreneurs with assets of about $500m, whose wealth tends to be tied up in their own companies, and who often want to borrow against these assets to buy houses in Mayfair or large yachts.

So far, banks that lend to wealthy clients have made money — one banker estimates that loan default rates have only been about 0.1 per cent. But those loans have yet to be tested in a global recession, with falling asset valuations. Only then Will we discover how profitable the business really is.

Third, despite rivalry among private banks, their ultimate competitors are the clients themselves. Wealth managers pitch themselves as trusted advisers but the ultra-rich with more than $100m are different from you and me — many employ their own investment advisers and lawyers in family offices.

There are now more than 10,000 single family offices, according to the consultancy EY, and the number is rising as more of the merely rich band together in multifamily offices. When it happens, private bankers are often excluded from the inner circle, where the most profitable decisions are made, and must pitch for smaller bits of business.

It is not a mystery that the richer someone is, the harder the bargain he or she tends to strike. The days of millionaires depositing money with Swiss banks and only occasionally visiting Lake Geneva to catch up with their bankers are in the past. Billionaires do not hand over cash lightly.

Wealth management is still an attractive business, given the alternatives. But before they start following bankers around the streets of Zurich and Singapore, banks should realise what they are rushing into. In finance, one-way bets are rarely what they seem.