On the Margin Newsletter: Pulse check on the STIR market

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Welcome to the On the Margin Newsletter, brought to you by Ben Strack, Felix Jauvin and Casey Wagner. Here’s what you’ll find in today’s edition:

• A pulse check on short-term interest rates and where we stand now.
• Ether ETFs hit the market today. Find out what we’re watching for.
• Kamala Harris is close to securing the official Democratic nomination. Where do her top VP picks stand on crypto?

Monetary plumbing deep dive

The monetary plumbing network, often referred to as short-term interest rates (STIR), is the esoteric world governed most directly by the Fed. For the most part, daily transactions in this part of the markets go unnoticed by the news media — that is, until something breaks.

The last time this happened was in September 2019, when the overnight repo market broke and repo rates skyrocketed, as shown below in the spread between Fed funds rate and interest on reserve balances:

The reasons this occurred are exotic and complex, but here’s a simple distillation: Because of ongoing quantitative tightening from the Fed, the amount of available collateral (Treasurys) got low enough so that there was too much cash in repo market chasing too few collateral, leading to a major demand spike that only the Fed could alleviate.

Quickly, the Fed opened up its standing repo facility to allow repo dealers to exchange their cash for collateral (Treasurys) in unlimited amounts. This was also the signal for the Fed to end its QT campaign and also marked the shift toward the eventual rate-cutting cycle.

This vignette shows just how important it is to pay attention to this part of the market, especially if you want to understand when the Fed’s monetary operations may inflect. With that in mind, let’s take a look at where we stand today.

Note: All charts are pulled from this excellent free dashboard so you can keep tracking it yourself!

Compared to September 2019, the current FFR-IORB spread is completely benign with no signs of collateral stress whatsoever. Essentially, we are very far away from anything breaking:

One of the key drivers of monetary stress is bank reserve levels. One of the most steady removers of bank reserves from the system has been QT that has led to an unwind of the Fed’s balance sheet:

However, as seen in the chart below, the vast majority of this unwind has been offset by money flowing out of the RRP and into the system, which has led to a muted decrease in reserve levels:

Here’s the TL;DR from the surface-level look at the STIR market:

1. Despite quantitative tightening happening for nearly two years now, there is no evidence of a shortage of bank reserves in the system.
2. Reserves have yet to reach the “ample reserves” threshold the Fed is targeting as a signal to end QT.
3. Due to the Fed’s heavy-handed approach to the STIR market and its whack-a-mole approach to patching up any sort of funding market issues, there is much less volatility and fragility in the system than the previous QT cycle in 2018-19.

— Felix Jauvin

$345

This is Citibank’s new price target for Coinbase stock. The updated figure is 33% higher than the institution’s previous figure.

“Shifts in the US election landscape and the Supreme Court’s overturning of the long-standing Chevron precedent has changed our view on Coinbase’s regulatory risks,” Citi research analysts wrote in a Monday note.

ETH ETF volumes (unsurprisingly) lag BTC debut

Nine spot ether ETFs are now trading on US exchanges. The milestone launches come half a year after the debut of US spot BTC funds.

The ETH products’ trading volumes are not at the level of the bitcoin ETFs’. But to be clear, nobody we spoke to thought they (or the funds’ inflows) would be.

The US bitcoin products saw roughly $4.5 billion of trading volumes on their first day (Jan. 11). The ether ETFs were trailing that pace considerably as of 1 pm ET, combining for nearly $600 million.

Bloomberg Intelligence analyst Eric Balchunas pointed to the data in an X post. If the pace keeps up, the $1 billion-plus in ETH ETF trading volumes would represent between 20% and 25% of those of the BTC funds launched in January.

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Grayscale’s more expensive Ethereum Trust ETF (ETHE) — carrying a 2.5% fee — was seeing the highest volumes, with about $250 million. The crypto asset manager also has a “Mini” version of the trust priced at 0.15%, which is the cheapest of its kind.

BlackRock’s iShares Ethereum Trust (ETHA) had notched $127 million in volumes by 1 pm ET, second only to ETHE. For comparison, the asset management giant’s bitcoin fund saw about $1 billion in trading volumes on its first day.

While volumes indicate the buying and selling of ETF shares, they do not yet give us a sense of net flows for these funds.

Grayscale research head Zach Pandl described the launch of ETH spot products as “low key” compared to the “splashy” debut of their BTC counterparts. While investors may be “under-appreciating” the importance of such products, Pandl added he expects “significant” net inflows into the ETFs in the coming months.

“These spot Ethereum ETPs are coming to the US market in tandem with a shift in US politics around crypto and as major financial institutions embrace tokenization,” the executive noted.

Analysts and executives have indicated the initial volumes and flows won’t tell the whole story about investor reception of these ETH funds.

But they tell the beginning of the story, and so we watch as history unfolds.

— Ben Strack

Harris’ VP short list

After her first full day on the campaign trail, Vice President Kamala Harris has apparently secured enough delegates to become the Democratic nominee, according to a survey from the Associated Press.

While Harris has kept her crypto opinions fairly under wraps, several of her potential picks for vice president have taken more direct stances:

Roy Cooper

Cooper, who is finishing up his second term as governor, in July vetoed a bill that sought to ban CBDCs in North Carolina. The state general assembly had passed the measure with broad bipartisan support. The vote came out to a 109-4 majority in the House and a 39-5 majority in the Senate.

Josh Shapiro

Earlier this year, grassroots environmental organization Save Carbon County sued Shapiro and Stronghold Digital Mining for alleged pollution and tax credit abuse. The environmentalists claim that under Shapiro, Stronghold and their subsidiary, Panther Creek Electric Generating Facility, received more than $20 million in renewable energy tax credits from Pennsylvania.

Mark Kelly

Kelly was one of the 12 Democratic Senators to vote in favor of Joint Resolution 109, the legislation that sought to overturn the SEC’s staff accounting bill 212. President Biden later vetoed the bill and the House earlier this month opted to uphold the decision.

Andy Beshear

In 2021, Beshear approved two Kentucky laws that provided tax incentives to cryptocurrency miners. The legislative effort sought to bring more mining operations to the state. It has been successful, though not without controversy.

Pete Buttigieg

Buttigieg, who made a run for the White House himself in 2020, said years ago that bitcoin should be “treated as a commodity.” The opinion at the time may have been revolutionary, but today even SEC Chair Gary Gensler has taken the same view on bitcoin.

— Casey Wagner

Bulletin Board

• Decentralized exchange dYdX is in talks to sell its derivatives platform, according to a report from Bloomberg.
• As expected, Vanguard does not allow customers to purchase the newly-launched ether ETFs on its platform. The announcement comes after the company said in January that it would not offer bitcoin ETFs either, citing volatility concerns.
• Coinbase CEO Brian Armstrong is no longer listed on the Giving Pledge, a global group founded by Bill Gates, Melinda Gates and Warren Buffet with a commitment to giving away their wealth. Armstrong originally joined the pledge in 2018.

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