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Darrell Duffie
Stanford University
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Well done and fascinating work! Thank you. MMFs invest in a mix of assets including bank deposits, tri-party repo, the Fed's reverse repurchase facility, treasury bills, and commercial paper. They pass the blended rate, less a constant fee, directly to their investors. So, the MMF passthrough effect can be broken down into a composition effect (which is not so exciting from a passthrough perspective, although revealing about substitution elasticity) and the passthrough into each asset component, where the passthrough action is most interesting. In our Jackson Hole paper*, Arvind Krishnamurthy and I showed the degree of passthrough to the underlying components of money markets. We did not have access, though, to all of the data available to you at the New York Fed. Your FRBNY colleagues Gara Afonso, Adam Biesenbach, and Thomas Eisenbach did some very helpful additional work on this.** I believe there is a lot more to be done on this important question. For example, as you point out, the relative degree of passthrough t o wholesale and retail investors could be changing. I expect, for example, more passthrough*** with the implementation of the Fed's proposed fast payment system, provided that the technology is sufficiently open for moving funds between banks. Conflict of interest: member of the board of directors of TNB Inc. *"Passthrough Efficiency in the Fed’s New Monetary Policy Setting", in Richard A. Babson, editor, Designing Resilient Monetary Policy Frameworks for the Future, A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 25-27, 2016, Federal Reserve Bank of Kansas City, pages 21-102. At https://www.darrellduffie.com/uploads/policy/DuffieKrishnamurthyAugust2016.pdf **"Mission Almost Impossible: Developing a Simple Measure of Pass-Through Efficiency", at https://libertystreeteconomics.newyorkfed.org/2017/11/mission-almost-impossible-developing-a-simple-measure-of-passthrough-efficiency.html ***"Digital Currencies and Fast Payment Systems: Disruption is Coming," for presentation at the Asian Monetary Policy Forum, preliminary draft, Graduate School of Business, Stanford University, May, 2019. At https://www.darrellduffie.com/uploads/policy/DuffieDigitalPaymentsMay2019.pdf
This is a useful and interesting post. As the authors say, there is not yet a clear story for the cause of the growth in fails. That's the most interesting question here. We do know some relevant factors. Dealer inventories of treasuries are much lower than pre-crisis, but they have been somewhat stable for a few years, so that on its own doesn't do it. The end-of-quarter stinginess of dealers with balance sheets is a factor mentioned by the authors. Dealers are placing more and more emphasis on reducing balance sheets in the face of pending leverage requirements, LCR, and NSFR, and they are not waiting until all regulations are in place. Volatility is low, which reduces inventory needs, but when vol is low, anyone shorting for a given risk exposure wants to take a bigger short position, stressing deliveries. The 3% fail penalty is not high enough, but that hasn't changed recently. We don't know much about which owners are keeping their treasuries away from the repo market, but that could be relevant. Foreign central banks own a lot of UST. There are a lot more direct bidders now in the auctions; perhaps the fact that treasuries are flowing directly to ultimate investors, and not hanging around on the street for a while, is important. The authors point out the interesting effect that predictions of high fail rates could be self-fulfilling. I would be interested to know if anyone can construct an important counterparty credit risk scenario that is related to delivery fails.
Excellent first note in this series. I am looking forward to more. You might consider showing a plot of the effective duration or WAM of the SOMA portfolio, perhaps using a new righthand scale and a line plot superimposed on each existing chart.
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Aug 12, 2013