La Saumure

Interesting to see that Gold is a victim of deleveraging here, but the SMI price action during a liquidity contraction seems to confirm its safe-haven status. This is reminding me the buffet one : "Only when the tide goes out do you discover who's been swimming naked."

To conclude quickly, I think that now, we are living a progressive decline of US safe haven status, but without any winner to take the throne. We are going to a more fragile system, which by definition is a system where frequent interventions are needed, to avoid the burst.

Another evidence of it is how the volatility of LT treasury inflows has doubled post covid and is reflecting far less appetite for duration (And also creating an "equitization of the $", but that will be a topic for later)

A strong sign of this shift is that offshore financial centres have grown far faster than total foreign Treasury holdings. Increasingly, the marginal buyer is a price-sensitive, repo-funded investor rather than a reserve manager, adding another layer of fragility to the system.

Post-SVB, The response was a more active debt management strategy: increased T-bill issuance, lower duration supply, a shorter WAM, and the drainage of excess cash from the RRP. The primary objective was clear: Implementing indirect QE to supress rates vol. So far, it has worked

Pre-2008, financial stability was largely imported through foreign savings recycling into U.S. assets. Post-2008, that mechanism weakened. Public intervention increasingly replaced foreign inflows as the key stabilizing force, to smooth stress on banks b/s and fill the gap.

In a highly leveraged system, the Fed and Treasury are increasingly managing volatility rather than rates themselves. When funding volatility surges, cross-asset deleveraging can emerge and threaten financial stability.

New paper out ! We introduce a framework to understand how U.S. authorities are preserving financial stability through 2 generations of policies The goal ? Buying time in a world of more volatile capital flows and declining foreign savings recycling. 🧵 (Link on last post)

OAT-Bund sprea vol is at 3.5σ. Historically the ECB steps in around 3σ widening ( '11, '22). RV is insanely attractive: OAT vs BTP ; AA corp ; ASW ... Shorts overcrowded. But TPI is political and EU want to punish FR, so the trigger might be Euro and not the spread.

Rare situation where the corporations are priced as safer than the FR gov bonds. Through a RV basis, this make no sense. The current aggressive OAT short positioning is being driven by speculators testing the ECB put imo. inst are waiting for budget vote or ecb to jump on it