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Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here. |
Oh, today’s bonus chart is a doozy!
The spotlight shines on the Federal Home Loan Bank (FHLB). In its inception by Congress in 1932, the vision was clear: empower homeownership. FHLB's primary role was to channel affordable, long-term funds to community and regional banks, streamlining mortgage distribution. Yet, as with numerous government-led programs, its reach has expanded (shocking), evolving into an essential liquidity reservoir for banks across the spectrum.
When banks grapple with liquidity crunches, they have an array of options. Picture a college student strapped for rent. The repo market is the quick cash solution from a buddy, while the FHLB resembles that reliable bank of mom and dad, repayable over a comfortable timeline. Should those sources dry up, they might turn to a more distant relation (BTFP) – think a girlfriend's generous folks, albeit with heftier interest, closely mirroring the Fed Funds rate plus a 10 bps premium. But if all roads close, it's akin to pawning off your treasured 2009 Honda Civic at the dreaded Fed discount window, where failure has its price – you might just end up walking!
Rewinding to 2007, the financial world witnessed FHLB morph into an unsung hero. Amid a liquidity tempest, it stepped in, rerouting term funding to its affiliates as market trust veered toward U.S. Treasury-backed securities. Yet, when FHLB's reservoirs proved inadequate by December 2007 and again by March 2008, banks, albeit begrudgingly, sought refuge at the Fed discount window. This chain reaction culminated in the seismic falls of giants like Lehman Brothers, Bear Stearns and Washington Mutual.
Jump to 2023, and FHLB's lending trajectory mirrors a SpaceX Starlink mission leaving Canaveral, drawing illustrious clients like Signature Bank, Ally Bank and Silicon Valley Bank, among others. The velocity of this lending surge, both in magnitude and pace, overtakes the 2007 benchmarks. And while this could hint at banks' amplified liquidity needs for mortgages, the overarching lending deceleration casts shadows of doubt. This spike might very well be the harbinger of a fresh cascade of bank implosions. Our attention is now fixated on BTFP and the discount window. Even as these liquidity facilities remain subdued for now, a word to the wise: while we may not be sounding full alarms, the circuit marshals are vigorously waving the cautionary yellow.
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Learn more about the Market Situation Report written by Tier 1 Alpha. |
