Jeffrey P. Snider: The Collateral Markets Are Starting to Freeze

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via Jeffrey P. Snider

Euro$ Collateral System is flashing red alarms, and it’s time to pay attention.

Japanese govt bills are the epicenter, but this issue runs deeper. Brace yourself, because the global collateral system, which is vital for the financial world, is sputtering. Collateral isn’t just about USTs;; it’s about a complex web of interconnected components.

1/ 🌐 Global Collateral System
When we think global collateral, thing beyond USTs; it’s Japanese bills or Italian BTPs.. All these pieces are woven together in the Euro$ fabric, intermediated by US dealers. Collateral flows matter, and sometimes the trouble begins where least expect.

2/ 🇮🇹 Italian Government Bonds
Italian bonds aren’t just any bonds; they are a linchpin of European collateral, making them essential for European Banks. When Italian bonds are no longer seen as ‘core’ collateral, trouble brews. And guess what? That’s what’s happening now.

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3/ Why Italian Bonds Matter
Italian bonds aren’t just ‘Italian.’ They can be swapped into USTs and used for US$ funding. Plus, European US$ providers, crucial players, are sensitive to euro-denominated collateral. So, Italian bond trouble ripples through the entire global system.

4/ 🇯🇵 Japanese Government Bills
But that’s not all. Japanese government bills are just as crucial,, too. Their yields have plummeted over recent weeks, strongly indicating rising collateral stress. When Japanese bills and Italian bonds are on shaky ground, it’s time to pay attention.

5/ 💲 US Dollar Swap Spreads
Watch the US$ swap spreads. They’ve been compressing, a sign that those US dealers are getting nervous about collateral quality. This affects the whole system, from Europe to Japan and beyond.

6/ 🛢️ Wounds Spread
Dollar providers become cautious, collateral gets scrutinized, and it’s a recipe for a global dollar shortage. What happens in one part of the Euro$ system doesn’t stay there; it too often spreads around the world.

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7/ 🌐 Collateral Insufficiency
This isn’t just a single issue; it’s a chain reaction. Collateral insufficiency, dealers cutting back, and a global dollar shortage loom. Even places like the U.S., with an ample supply of treasury bills, aren’t immune.

8/ 🚨 Conclusion
The warning signs are all there: Japanese government bills, Italian bonds, US dollar swap spreads – they’re not isolated incidents. It’s a systemic problem in the Euro$ Collateral System. Brace for impact, because another storm is brewing.