Is the FED flirting again? Flirting With Negative Rates Is A New Reality

By: Emily Barrett



The Federal Reserve appears to have succeeded in quashing bets on a future of negative interest rates in the U.S., only to see yet another benchmark rate dip below zero.


Hedges against a further rate cut disappeared from swaps and fed funds futures contracts this week, after a string of Fed officials, including Chair Jerome Powell himself, reiterated their aversion to a policy of negative interest rates. Then the benchmark for secured funding markets, the general-collateral rate, dropped below zero again Wednesday.


The Fed’s unlikely to sweat this drop, as technical factors are key to both the behavior of general collateral and the derivatives trades that showed up earlier this month. But it’s the reality of this world, with rates barely above zero in the U.S., that questions of whether and how key rates can remain positive are likely to keep popping up.


The drop in the U.S. overnight GC repo rate below zero may prove short-lived. These rates tend to slip as government-sponsored enterprises park cash for principal and interest payments in the repo market around mid-month, and that money typically exits the following week in distributions to mortgage-bond holders.

Strategists have attributed the positioning that popped up in futures for fed funds and overnight index swaps earlier this month to technical accounting issues. But their evaporation this week may mean that the market has heeded the Fed’s message that it’s not ready to embrace a policy that could harm savings, not to mention the $4 trillion money-market industry and bank profits.


— With assistance by Alex Harris

0 views

Recent Posts

See All

Fractal Finance

872-225-2110 ext. 2

FAX: 872-225-2110

  • facebook
  • twitter
  • linkedin

©2020 BY QUANT TRADE, LLC. QUANT TRADE, LLC IS NOT RESPONSIBLE FOR CLIENT OR SUBSCRIBER LOSSES. TRADING FUTURES, STOCKS, FOREX AND OPTIONS INVOLVES THE RISK OF LOSS. YOU SHOULD CONSIDER CAREFULLY WHETHER FUTURES, STOCKS, FOREX AND OPTIONS ARE APPROPRIATE TO YOUR FINANCIAL SITUATION. YOU MUST REVIEW THE CUSTOMER ACCOUNT AGREEMENT AND RISK DISCLOSURE PRIOR TO ESTABLISHING AN ACCOUNT. ONLY RISK CAPITAL SHOULD BE USED WHEN TRADING FUTURES, STOCKS, FOREX AND OPTIONS. INVESTORS CAN LOSE MORE THAN THEIR INITIAL INVESTMENT. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES OR OPTIONS CAN BE SUBSTANTIAL, CAREFULLY CONSIDER THE INHERENT RISKS OF SUCH AN INVESTMENT IN LIGHT OF YOUR FINANCIAL CONDITION. INFORMATION CONTAINED, VIEWED, SENT OR ATTACHED IS CONSIDERED A SOLICITATION.