US Money Market Funds Back in the Bank Funding Game

Given zero or near zero interest rates everywhere, US money market funds keep returning to the playing with fire by financing the short term dollar requirements of euro-land banks – especially French ones. However, not only that, they also hold vast exposure to banks elsewhere.

From a recent Fitch missive on the topic:

“U.S. prime money market fund (MMF) exposure to eurozone banks decreased slightly over the most recent reporting period. Despite the decline within the eurozone as a whole, allocations to French banks continued to increase and, as of end-December 2012, represented 6.5% of MMF assets under management within Fitch Ratings’ sample (see chart, Eurozone Banks — Slight Dip, Despite French Increase). For the first time since end-August 2011, France represents the largest single country exposure within Europe. As a percentage of MMF assets, allocations to French banks are at their highest level since end-September 2011.


To be sure, the overall levels don't seem excessive yet by comparison to the summer of 2011, but they represent a quite hefty percentage of MM fund assets even so:



MM funds euro bank funding

US MM fund assets in short term European bank paper, via Fitch



What's more, 13.2% of MM fund assets are invested in Japanese bank paper, 12.4% in Canadian bank paper, and 8.9% in Australian bank paper. The latter two are grave risks due to the potential for their real estate and household debt bubbles blowing up, the former is harboring 'Abe risk' (i.e., Shinzo Abe inflation and thus fiscal crisis risk). We're not sure what the MM fund managers are thinking. That they will be able to jump ship at just the right time as if by magic?

42% of all US MMF assets are concentrated in just 15 banks (as opposed to less than 29% exposure they have to US treasury debt). Nine of those are Japanese, Australian and Canadian banks, four are European, and two qare US banks (JPM and BAC).

We can see how the dollar funding problems have by now ended almost completely for European banks by considering euro basis swaps:






3 month, 1 year, 3 year  and 5 year euro basis swaps: happy days are here again.



However, our proprietary European bank CDS index has been perking up a bit lately (possibly the recent troubles of Banca Monte dei Paschi di Siena may have something to do with that)




Our proprietary unweighted index of 5 year CDS on the senior debt of eight major European banks – the white line (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito), compared to 5 year CDS on the senior debt of Goldman Sachs (orange), Morgan Stanley  (red), Citigroup (green) and Credit Suisse (yellow)



Interestingly, there is still a very wide gap between US and euro-land inflation expectations:




The price of gold (yellow line) versus US (orange line) and euro-land (white line) inflation expectations



Lastly, here is a chart of the Euro-Stoxx bank index – it could well be that an A-B-C type correction is close to ending, although we can of course not be sure of that.




The past two years in the Euro Stoxx bank index, daily. Was the recent rally an a-b-c- corrective move?



Welcome Back, Your Eminence?

The point of all this is to show that current sentiment is the exact opposite of what it was in August to November 2011.

In this context, Bloomberg reports “Bank Bonds Poised to Recapture Pre-Crisis Yield Eminence”. Although the report concerns US banks, the mood in Europe is of anything even more bullish. European bank bonds have seen a veritable flood of buyers snapping them up lately.

“Banks are poised to overtake industrial companies as the safest borrowers in the $5.1 trillion U.S. corporate bond market for the first time since the start of the worst financial crisis since the Great Depression.

Investors demand an extra 154 basis points in yield over benchmarks to buy bonds of JPMorgan Chase & Co., Wells Fargo & Co. and other lenders, compared with 138 basis points for companies from Alcoa Inc. to Ford Motor Co., Bank of America Merrill Lynch index data show. At 16 basis points, the gap has shrunk from a peak of 365 in 2009 and may invert as soon as this year based on the current pace of tightening.”

Now, to our mind the balance sheets of big banks remain as opaque as ever. Let us not forget, mark-to-market remains suspended. We know that many of the banks' assets have seen vast improvement, but do they really deserve to be rated as 'safer' than industrial companies? That strikes us as rather odd.

As an aside, Moody's has just downgraded six Canadian banks (we're not sure why, but we suspect potential bubble trouble – “high home prices and consumer debt” were definitely mentioned). This information and the next chart come courtesy of “Investment Watch”. The next chart illustrates the state of Spain's mortgage market. Not that it is really surprising, but we thought it is quite instructive: mortgage approvals have now even fallen below the numbers that prevailed before the bubble.



Spanish mtges_0

Number of Spanish mortgages approved. A full round-trip from the bubble period and then some.



So will all this new-found state of financial sector bliss last? We kind of doubt it, but as readers are probably well aware, our skepticism has so far proved, if not ill-founded, then it least 'way too early'. However, we cannot help it: we simply don't believe that the world can possibly have been made a richer and better place by means of printing wagon-loads of money. It would really be a first.


Post Scriptum: Attacks on Private Banks A Bit Too Popular

Lately it has become very fashionable to attack the 'banksters', especially, or rather almost exclusively, the private ones. Central bankers are considered taboo, they are above all reproach. The Daily Bell has recently published a number of articles taking what one might call a 'contrarian stance' on the issue. We think they may be on to something. What all these attacks on bankers appear to have in common is their deeply anti free-market, statist bent. This campaign does smell a bit funny.

We are often criticizing the banking system here, but we sure have no problem with private banks as such. We have a problem with central bank-directed cartelized banking, and we have a problem with the practice of fractional reserve banking (in a truly free banking system we believe it may actually die out of its own accord). Here are the links to the Daily Bell articles, which are well worth the read:

Root for Wall Street to go to Jail” (PBS wants bankers to go to jail, but somehow misses a great many other worthy targets in it campaign)

The Heroism of Iceland's Grimsson, the Man Who Stood Up to the Banksters

Icelandic hero Olafur Ragnar Grimsson reconsidered, as he speaks from…Davos? What is the bane of banksters doing in Davos anyway?

"Nationalize Banking? Or Apologize for the Suggestion …

A leftist economist wants to nationalize the banks. Splendid idea, let the State take over banking completely.


"Senators Demand that Banks Be Punished – but Not the Fed"

The US Senate is at it as well….

Charts by: Bloomberg, Fitch, SocGen, BigCharts



Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


One Response to “News from the Banking Realm”

  • zerobs:

    People hate the banksters because they are a protected class. Understandable, but the hatred should really be directed toward those protecting them.

    I wouldn’t invest my money in a bank, but it’s hard to argue that stance when banks are so well protected by their sovereigns that half of their taxpayers will be sacrificed before another (large) bank or insurance company is allowed to fail. Naturally, people are going to wonder just why the banks rate higher than they do in the hearts and minds of their elected officials. Since the people elected those officials, they are somewhat “in love” with those officials so they refuse to see their faults and sins. So all the sins are projected onto the objects of their elected officials’ desires.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • US Stock Market: Conspicuous Similarities with 1929, 1987 and Japan in 1990
      Stretched to the Limit There are good reasons to suspect that the bull market in US equities has been stretched to the limit. These include inter alia: high fundamental valuation levels, as e.g. illustrated by the Shiller P/E ratio (a.k.a. “CAPE”/ cyclically adjusted P/E); rising interest rates; and the maturity of the advance.   The end of an era - a little review of the mother of modern crash patterns, the 1929 debacle. In hindsight it is both a bit scary and sad, in...
  • A Giant Ouija Board - Precious Metals Supply and Demand Report
      Object of Speculation The prices of the metals fell last week, $22 and $0.24 respectively. It’s an odd thing, isn’t it? Each group of traders knows how gold “should” react to a particular type of news. But they all want the same thing — they want gold to go up. And when it doesn’t, many hesitate to buy. Or even sell. This is why speculation cannot set a stable price (I’m talking to you, bitcoiners).   Everybody wants gold to grow wings. Unfortunately it's rather...
  • How to Blow $12.2 Billion in No Time Flat
      Fake Responses  One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.   As the party continues, the dance moves of the revelers are becoming ever more ominous. Are they still right in the head? Perhaps a little trepanation is called for to relieve those brain tensions a bit?  [PT]   The stock market, like the President,...
  • Purchasing Power Parity or Nominal Exchange Rates?
      Extracting Meaning from PPP   “An alternative exchange rate - the purchasing power parity (PPP) conversion factor - is preferred because it reflects differences in price levels for both tradable and non-tradable goods and services and therefore provides a more meaningful comparison of real output.” – the World Bank   Headquarters of the World Bank in Washington. We have it on good authority that the business of ending poverty is quite lucrative for its practitioners...
  • Broken Promises
      Demanding More Debt Consumer debt, corporate debt, and government debt are all going up.  But that’s not all.  Margin debt – debt that investors borrow against their portfolio to buy more stocks – has hit a record of $642.8 billion.  What in the world are people thinking?   A blow-off in margin debt mirroring the blow-off in stock prices. Since February of 2016 alone it has soared by ~$170 billion - this is an entirely new level insanity. The current total of 643...
  • Stock and Bond Markets - The Augustine of Hippo Plea
      Lord, Grant us Chastity and Temperance... Just Not Yet! Most fund managers are in an unenviable situation nowadays (particularly if they have a long only mandate). On the one hand, they would love to get an opportunity to buy assets at reasonable prices. On the other hand, should asset prices actually return to levels that could be remotely termed “reasonable”, they would be saddled with staggering losses from their existing exposure. Or more precisely: their investors would be saddled...
  • Despondency in Silver-Land
      Speculators Throw the Towel Over the past several years we have seen a few amazing moves in futures positioning in a number of commodities, such as e.g. in crude oil, where the by far largest speculative long positions in history have been amassed. Over the past year it was silver's turn. In April 2017, large speculators had built up a record net long position of more than 103,000 contracts in silver futures with the metal trading at $18.30. At the end of February of this year, they held...
  • From Bling to Plonk – An Update on the Debt Mountain
      Serenely Grows the Debtberg We mentioned in a recent post that we would soon return to the topic of credit spreads and exotic structured products. One reason for doing so are the many surprises investors faced in the 2008 crisis. Readers may e.g. remember auction rate securities. These bonds were often listed as “cash equivalents” on the balance sheets of assorted companies investing in them, but it turned out they were anything but. Shareholders of many small and mid-sized companies...
  • US Equities – Mixed Signals Battling it Out
      A Warning Signal from Market Internals Readers may recall that we looked at various market internals after the sudden sell-offs in August 2015 and January 2016 in order to find out if any of them had provided clear  advance warning. One that did so was the SPX new highs/new lows percent index (HLP). Below is the latest update of this indicator.   HLP (uppermost panel) provided advance warning prior to the sell-offs of August 2015 and January 2016 by dipping noticeably below the...
  • Return of the Market Criers - Precious Metals Supply and Demand
      Ballistically Yours One nearly-famous gold salesman blasted subscribers this week with, “Gold Is Going to Go Ballistic!” A numerologist shouted out the number $10,000. At the county fair this weekend, we ran out of pocket change, so we did not have a chance to see the Tarot Card reader to get a confirmation. The market criers are back in gold town [PT]   Even if you think that the price of gold is going to go a lot higher (which we do, by the way—but to lean on...
  • Good Riddance Lloyd Blankfein!
      One and the Same   “God gave me my money.” – John D. Rockefeller   Today we step away from the economy and markets and endeavor down the path less traveled.  For fun and for free, we wade out into a smelly peat bog.  There we scratch away the surface muck in search of what lies below.   One should actually be careful about quotes like the one attributed to Rockefeller above, even if it of course sounds good and is very suitable for the topic at...

Support Acting Man

Item Guides


Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Buy Silver Now!
Buy Gold Now!

Diary of a Rogue Economist