Markets update: Tax Day, bitcoin, stocks, & rates
As Tax Day approaches, each asset class will have an opportunity to demonstrate any cracks in its foundation. S&P 500 broke a trendline.
Dear readers,
It’s a fight over money. I witnessed firsthand as a money markets trader responsible for the daily cash needs of large institutional clients that the calendar matters a lot. And while month-end and quarter-end dates certainly affect marginal positioning, both for investment managers and the sell side on Wall Street alike, large payment dates matter much more.
Think back to the repo crisis of September 2019—the initial explanation for the spike in repo rates was the September 15th tax payment deadline for corporates. As companies paid money to the government, money leaves one area of the financial system and enters another. Until that money comes back into the economy, it’s technically missing in action. We aren’t predicting a repeat of any sort, but we can certainly use this moment to teach and speculate. Let’s break down this fight.
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Today’s topics
Tax day implications for markets
Latest economic releases show ISM manufacturing back above 50
Coinbase finally goes for Lightning Network integration
Bitcoin price consolidation
Stocks and a surprise appearance from NVIDIA
Treasury yields moving higher
Gold’s breakout
A fight for money
Why is it a fight for money? Start with the sole proprietor with a $1 million tax bill due on April 15th. Currently, that money sits in a money market fund, because the business owner is preparing to send the money out to the IRS—one of the United States’ most troubling institutions, but we’ll save that fight for another day. The money sits in a money market fund (MMF), which invests that $1 million in safe assets. Now, the MMF manager is fully aware of the upcoming tax day deadline, so funds are invested in not just safe assets, but overnight securities—the MMF doesn’t know if the business owner will pay his taxes on April 15th or potentially tomorrow.
Which overnight securities can the MMF invest in to satisfy all mandates: safety, liquidity, and fulfilling redemptions without a hiccup? The best option is overnight repo. When an MMF has cash that might leave tomorrow, one of the best ways to invest that capital is to lend it, on a Treasury-collateralized basis, to a dealer bank with Treasury inventory. Sure, the MMF could invest the cash in the Fed’s reverse repo facility (RRP), but the yield will likely be a few basis points higher with a dealer bank.
Banks that finance Treasury holdings through the repo market via MMFs are starting to post higher rates to attract capital. Last week, we warned that there is an increasing likelihood of money market disruptions due to tax day, and this is more specifically what we mean. If cash is leaving MMFs and going to the government during the first couple weeks of April, who suffers the most? The answer is banks, especially those relying on repo funding. When taxpayers pay the government, money leaves MMFs, MMFs reduce repo investment with dealer banks, and dealers are forced to increase repo rates in order to attract the necessary capital to fund their Treasury positions.