The Pipeline

On this leap day edition of the Pipeline, we present four articles.

Our first article outlines recent macro developments that impact potential interest rate scenarios over the next year. I look at the ongoing convergence between market views as captured by Fed Fund futures/the yield curve and Fed views from the last dot plot, risks from the CRE space and finish with implications for the agency coupon stack.

In this article, we look at recent macro developments, the discrepancy between the Fed’s view and the rate path views embedded in Fed fund futures and discuss some potential scenarios that could evolve over the course of the year. We finish by looking at the agency coupon stack and the potential implications of these scenarios.

Much to the dismay of securities markets, which have struggled to price risk in an uncertain environment, the auto market has been on a joy ride for the past few years. When reflecting on just how strange the market has been, several things come to mind: appreciation of new and used vehicles; a couple of ABS deals are positioned to incur losses on a few lower tranches; manufacturers’ wide production of electric vehicles—and a sports car launched into outer space.

On February 15, the Federal Reserve Board (Fed) released two scenarios—Base and Severely Adverse—for the 2024 Comprehensive Capital Analysis and Review (CCAR). In addition, the Fed released two exploratory scenarios (A and B) that combine economic stresses with higher, rather than lower, interest rates, thereby increasing the cost of funding. These scenarios describe three-year trajectories based on key economic indicators.

As financial professionals, we spend much of our time evaluating financial products such as credit cards, mortgages, insurance, and investments to determine how to manage risk and grow net present value for our employers. We spend less time, perhaps, thinking about why these products exist at all and if they are providing benefit to our customers. Much of our financial and regulatory system is built on the idea that it is the duty of the customer to determine which products are right for them and what price to pay.