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How AI debt financing impacts duration supply and interest rates
Financing needs related to AI data center investments are likely to be large and persistent. While the overall economics of such investments remains a topic of much debate, the duration supply implications for U.S. interest rate markets have received less attention.
How sensitive is the Treasury cash-futures basis trade to funding condition shifts?
The Treasury cash-futures basis trade, a very large, leveraged Treasury trade, has drawn scrutiny because unwinding positions amplified stress during the pandemic-era market shock of March 2020. With estimates suggesting the trade has since grown larger, attention is focused on how well it might weather future shocks.
Working Paper
An Asset-Liability Management Approach to the Federal Reserve Balance Sheet
The Federal Reserve’s liabilities include a mix of floating-rate instruments, such as reserves, and long-duration, non-interest-bearing instruments, such as currency. We investigate the implications of an asset-liability management approach to choosing assets to back these liabilities, with a focus on matching the duration of assets and liabilities. We study the net income volatility and mark-to-market volatility of several different asset maturity ladders using a Monte Carlo simulation of future interest rate paths. Short-duration ladders minimize net income volatility when paired with ...
Accounting for interest rate risk: Matching Fed assets to liabilities
The Fed has floating-rate liabilities as well as long-lived, zero-interest liabilities. A barbell of floating-rate and long-duration assets would best offset the interest rate risk from these liabilities. Investing in a more diversified mix of durations, while matching the average duration of assets, could be more practical than the barbell approach but would leave a substantial portion of interest rate risk unhedged.
What drives mortgage rates and their response to monetary policy changes
Mortgage rates are an important channel for monetary policy pass-through. However, this channel is complex.
Working Paper
Term Funding Premium—Time Is Money After All
Term premium plays an important role in understanding the evolution of interest rates, and has even been the target of monetary policy when short-term rates were at or near an effective lower bound. It is commonly defined as the difference between a long-term interest rate and the geometric average of short-term rates over the same horizon, making it unobservable. While many approaches exist to estimate term premium, they treat term premium as the market’s price for bearing interest rate risk. Although such frameworks have sufficed historically, they cannot explain the premium embedded in ...