The financial environment in the United States is once again tightening
2023-06-08
■The global financial environment centered around the United States has tightened again, gradually returning to the situation before March.
■The prolonged monetary tightening has increased the likelihood of correcting imbalances such as credit risk and international capital flows. The global financial environment is returning to the situation before March, when banks in the United States and Europe experienced operational gaps one after another.
In the United States, which has become the epicentre of financial system turmoil, as of May 31st, the balance of assets held by the Federal Reserve has decreased to the level since March 8th, before the collapse of Bank of America. Looking at the details, the loan balance of financial institutions such as the Bank's Standard & Poor's Plan (BTFP), the loans of financial institutions under the management of the Federal Deposit Insurance Corporation (FDIC), which has increased sharply since March, is still moving at a high level. However, the balance of U.S. treasury bonds, residential mortgage securities (MBS), and other securities continues to decrease at the same speed as before. The weekly financial stress index (St. Louis Fed) and financial environment index (Chicago Fed) released by the US Federal Reserve have dropped to pre-March levels, indicating that the financial market is once again stabilizing. The deposit balance of small commercial banks in the United States indicates a significant slowdown in the pace of reduction, until March next year when BTFP continues to provide liquidity support, and the banking system is also moving towards convergence.
In the case that the economic slowdown and Disinflation remain at a slow pace, the early interest rate reduction observation of the United States has subsided. Although the yield of short-term and medium-term U.S. treasury bonds interwoven by interest rate suspension and interest rate reduction in the future is lower than the level before March, the negative range of the yield difference between two-year and 10-year U.S. treasury bonds narrowed in the first ten days of March has expanded again, and the dollar index in the foreign exchange market has turned to rise. In the financial market, a move similar to the sharp interest rate increase of the Federal Reserve last year has been observed. In addition, last week, with the US Debt limit frozen until January 2025, in order to restore the fund balance of the US Treasury, it is expected that the issuance of US short-term treasury bonds will increase in the coming months. This means that the US Treasury will accelerate the absorption of liquidity from the financial market, which will be one of the main reasons for the rise in the yield of US short-term treasury bonds. In addition to market transactions, after banking issues in March, the strictness of credit standards for financial institutions has also been hinted at in investigations and other aspects in the future.
In summary, while the tension in the financial market is easing, the financial environment is once again tightening. In March, Interest rate risk (the valuation price of the bonds held fell) triggered the financial system's anxiety. While the financial contraction was prolonged, there was no apparent credit risk (the financial condition of the credit objects worsened, chain bankruptcy, etc.), international capital flows (the appreciation of the U.S. dollar accompanied by rapid capital outflows from emerging countries), etc. So far, the probability of the accumulated imbalance being corrected will increase.
■The prolonged monetary tightening has increased the likelihood of correcting imbalances such as credit risk and international capital flows. The global financial environment is returning to the situation before March, when banks in the United States and Europe experienced operational gaps one after another.
In the United States, which has become the epicentre of financial system turmoil, as of May 31st, the balance of assets held by the Federal Reserve has decreased to the level since March 8th, before the collapse of Bank of America. Looking at the details, the loan balance of financial institutions such as the Bank's Standard & Poor's Plan (BTFP), the loans of financial institutions under the management of the Federal Deposit Insurance Corporation (FDIC), which has increased sharply since March, is still moving at a high level. However, the balance of U.S. treasury bonds, residential mortgage securities (MBS), and other securities continues to decrease at the same speed as before. The weekly financial stress index (St. Louis Fed) and financial environment index (Chicago Fed) released by the US Federal Reserve have dropped to pre-March levels, indicating that the financial market is once again stabilizing. The deposit balance of small commercial banks in the United States indicates a significant slowdown in the pace of reduction, until March next year when BTFP continues to provide liquidity support, and the banking system is also moving towards convergence.
In the case that the economic slowdown and Disinflation remain at a slow pace, the early interest rate reduction observation of the United States has subsided. Although the yield of short-term and medium-term U.S. treasury bonds interwoven by interest rate suspension and interest rate reduction in the future is lower than the level before March, the negative range of the yield difference between two-year and 10-year U.S. treasury bonds narrowed in the first ten days of March has expanded again, and the dollar index in the foreign exchange market has turned to rise. In the financial market, a move similar to the sharp interest rate increase of the Federal Reserve last year has been observed. In addition, last week, with the US Debt limit frozen until January 2025, in order to restore the fund balance of the US Treasury, it is expected that the issuance of US short-term treasury bonds will increase in the coming months. This means that the US Treasury will accelerate the absorption of liquidity from the financial market, which will be one of the main reasons for the rise in the yield of US short-term treasury bonds. In addition to market transactions, after banking issues in March, the strictness of credit standards for financial institutions has also been hinted at in investigations and other aspects in the future.
In summary, while the tension in the financial market is easing, the financial environment is once again tightening. In March, Interest rate risk (the valuation price of the bonds held fell) triggered the financial system's anxiety. While the financial contraction was prolonged, there was no apparent credit risk (the financial condition of the credit objects worsened, chain bankruptcy, etc.), international capital flows (the appreciation of the U.S. dollar accompanied by rapid capital outflows from emerging countries), etc. So far, the probability of the accumulated imbalance being corrected will increase.