Remember when the Federal Reserve was keeping short-term repo rates low after the dot.com and Internet busts and the 9/11 attacks? Some blame those low interest rates for fueling the destructive housing bubble in the past decade, in part because banks could borrow so cheaply on the repo market, turn around and invest that money in mortgages, and make big profits.
Bloomberg tells us today that investors are pouring the most money in at least five years into Real Estate Investment Trusts, which are paying generous dividends because their borrowing costs on the repo market are so low. That’s thanks to the Federal Reserve buying bonds to keep cash circulating in the economy.
REITs can now earn 3.95 percentage points more on some government-backed mortgage securities than they have to pay for a repo loan using those securities as collateral, according to Bloomberg. That spread reached 4.21 percentage points last month.
The U.S. Securities and Exchange Commission may propose dropping credit-rating references from money-market fund regulations and using a different method to evaluate their portfolios, reports Bloomberg.
Among other things, that would remove the use of credit ratings to assess collateral in repurchase agreements. The money market funds themselves would be responsible for weighing the credit quality of the securities.
The Dodd-Frank regulatory overhaul enacted in July requires regulators including the SEC to eliminate references to credit ratings in their rules by July 21, replacing them with an “appropriate” new standard. The idea is to replace credit agencies, which made massive rating errors in the lead-up to the financial crisis of 2007-2008, with investors themselves, who have a personal incentive to get it right. But critics say investors are not qualified to make those difficult and sophisticated assessments.
And from Abu Dhabi, here come Sharia repos:
The National Bank of Abu Dhabi plans to offer Sharia-compliant repurchase agreements, reports The National, an Abu Dhabi-based newpaper. The first transaction will be announced at the Global Financial Markets Islamic Forum in Abu Dhabi that started February 27, the newspaper said.