Macro and micro woes

The U.S. short term interest rate curve is under increasing stress. In the chart below you can see the difference between SOFR, the rate at which banks lend to each other, and Fed funds, the rate at which the Fed lends money. In a normal market, the difference between both rate should be close to zero. In a stressed one, banks start to express their doubts of being repaid on their loans to other banks by demanding a higher rate. Why is this happening now? After First Brands bankruptcy, the market is starting to discount that there may be other bankruptcy cases hidden in banks books, particularly the regional ones. These are banks that are not considered systemically important by regulators, but are big enough to create a problem that spreads into the rest of the financial sector, and if not contained, the economy. They have suffered pronounced falls in the stock market and the level of concern is raising. The Fed may be forced to act soon if the stress levels continue to raise. Perhaps a more aggressive rate cut than anticipated at the end of the month, or liquidity lines, although that’s considered a red flag. If that wasn’t enough, in the Macroeconomic landscape, Argentina, and now South Korea, are in need of U.S. dollars, and the Treasury is extending swap lines to help them cope with the demand. Swap lines are not considered bailouts, but if not extended, they may create the need for rescue packages as liquidty and solvency become a problem. The next two weeks are very important to calm fears both at macro and micro levels. In the meantime, Gold prices are going parabolic.

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