On Wednesday, we noted the renewed tightness developing in dollar funding markets. Ignoring embryonic signs of stress in the financial ‘plumbing’ can be dangerous. The divergence of LIBOR from Fed Funds on 9 August 2007, which occurred two months prior to the peak in the Dow, always comes to mind. Fast-forwarding to the present when Mark Cabana, Bank of America’s head of US STIR, has been fielding client questions about the impact of proposed US tax reform. In particular, clients asked for Cabana’s view on what effect dollar repatriation by US corporates might have on funding markets if favorable tax treatment is forthcoming.
Spoiler alert – negative for dollar funding markets (and of course positive for the dollar).
Cabana explains ‘As Washington has increasingly focused on tax reform, clients have asked questions about how repatriation might impact the front end of the US rates curve. While there are still many unknown elements of the plan, we believe repatriation could provide modest upward USD funding pressure for foreign banks but likely leave the overall stock of commercial paper outstanding little changed.’
This post was published at Zero Hedge on Oct 20, 2017.