London (Reuters): Friday was the first time since the COVID-19 crisis in 2020 that the demand for U.S. dollars was as high as it was on Friday. Investors were looking for cash at the end of one of the most volatile quarters in decades.
In the three months leading up to September, central banks stepped up their fight against inflation by raising interest rates quickly. They did this to get rid of the cheap cash that had built up in the system during the pandemic.
JPMorgan (NYSE: JPM) says that asset managers have more cash on their balance sheets now than at any time since 2012. At the same time, the S&P 500 is heading for its third straight quarterly loss, which hasn’t happened since the 2008 financial crisis.
The main winner has been the dollar, thanks in large part to the Federal Reserve’s promise to use as many rate hikes as it takes to bring down consumer prices.
So far this year, bond yields have gone up in response, and JPMorgan says that this is the most they have ever gone up in nine months. [LIVE/]
Friday, the three-month euro/dollar cross-currency basis swap spreads went up to -49 basis points, which is the highest they’ve been since March 2020, when the pandemic nearly shut down the entire economy.
“This is partly because it’s the end of the month and partly because of other worries about liquidity,” said Jane Foley, a strategist at Rabobank.
So far in September, this spread has widened by 46 basis points, which is the most since September 2008, when the financial crisis exploded, bringing down investment banks like Lehman Brothers and causing a rush for the safety of the U.S. dollar that had never happened before.
Yen swap spreads grew even more quickly, reaching -62.75 basis points, which is the most since March 2020. This is because the Bank of Japan made a historic move this month by intervening in the currency market to help the yen.
Widening spreads show that non-U.S. borrowers are willing to pay more to borrow dollars, and this could eventually force the Fed to run liquidity operations like repos and swap lines to ease the strain on swap markets.
The Bank of England stepped into the bond market on Wednesday to stop long-term yields from going up. This came after the British government’s most recent fiscal plan sent domestic markets into a freefall.
Around $1.0327, the pound fell to a record low against the dollar, and the British government had to pay more to borrow money than countries with more debt, like Italy and Greece.
Sterling cross-currency basis swaps didn’t change much. They went from +4 bps on Monday to -28 bps on Friday, which was the lowest since Russia invaded Ukraine.
