Imminent Yield Curve Uninversion
A timely and essential global macroeconomic and markets update: Fed, rates, and risk.
Dear readers,
A high-quality Swiss watch can have over 100 moving parts. Oftentimes, it can feel like the global economy has the movement of a complicated timepiece, with each individual part useless by itself, and those that can fully comprehend how every individual component interacts with the rest hard to come by. It lends to our overall approach here at The Bitcoin Layer—factor in as many moving parts as possible, knowing full well it still might not be enough to capture the panorama. Nevertheless, a week like this gives us so much to analyze that we feel like we are sitting next to the finest watchmakers in Geneva. We’ll start with the Fed, and end with why a bitcoin allocation has never been more important.
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Today’s Topics
The Fed makes an announcement on BTFP. Big deal or not?
This follows a move last week on the discount window. Fed playing a little chess.
Banks and central banks are nervous about the next crisis. We have evidence.
Treasury and the Fed are playing chess against each other? We investigate.
Treasury makes its quarterly financing announcements next week. Does it matter?
FOMC next week as well. What to expect.
IMMINENT YIELD CURVE UNINVERSION.
Charts: 2s10s, 2s, 10s, S&P 500, bitcoin.
BTFP sunset
Simultaneously to nobody’s surprise and out of nowhere, the Fed announced an afternoon during-the-quiet-period change to monetary policy on Wednesday. It was a very minor adjustment, coupled with some speculation. Let’s start with the facts:
The Fed announced two separate policies. First, it ended the arbitrage trade building up for the BTFP. This facility, originally instituted in order to stave off the regional banking crisis of March 2023, had recently opened the door to a borrow-low-invest-higher trade with the Fed on both sides. In other words, banks could borrow from the Fed and then invest at the Fed, making free money. Obviously incongruent with the intended purpose of the facility, the BTFP arbitrage trade was killed.
Second, the Fed formally announced that the facility would not be extended, meaning that banks will no longer be able to take out new loans after March 11th. This still means that they can borrow for up to one year on March 10th, but it’s time to sunset the Silicon Valley Bank legacy.
By themselves, these two policy shifts are minor. In fact, I genuinely don’t think either is newsworthy by itself. But as aspiring watchmakers, you, Joe, and I aren’t falling for the BTFP announcement as an isolated event. Today, we will slowly unpack the bigger picture—our financial system is highly unstable, and the cause of it is the duality of leveraged banks and hazardous lenders of last resort injecting financial narcotics, a more appropriate term for bailouts.
In isolation, my opinion of the BTFP canceled arbitrage and sunsetting facility is that the timing felt panicky. Stocks had just made their fourth consecutive all-time high, so maybe Powell was in a mood. But the FOMC meeting was only one week away, and Fed members were not allowed to give media appearances, giving the market absolutely nothing to go on other than a press release. I empathize with those who think this whole episode carries no importance, but I’ve been reading the Fed as scared for months, hence the pause and subsequent capitulation in December when Powell admitted rate cuts were the next move despite 3%-5% GDP (!!) to finish the year. He’s either spooked by the deflation bug or something dark down under. That down under is banking.
Don’t discount this decision
That leads us to the Fed’s announcement from last week, a training exercise for banks to tap the Fed for discount window funds in a crisis:
Another way to explain this is in simple speak instead of Fedspeak:
We are not sure if there will be another crisis. But if there is, we want you to use a facility that has existed for decades but you might be afraid to touch. Please practice using it. Oh, and it’s not an option. Do it.
Discount window usage was the obvious substitute for BTFP, so it makes sense the two announcements came one after the other. Again, by themselves, none of these measures foretell a crisis. They do, however, resemble a formal effort. What exactly is the effort, and whose effort is it? The answer to whose effort is not the Fed, in isolation. I’ll explain.