Stigum’s Money Market

Stigum’s Money Market is a comprehensive guide to the money market—U.S. and Eurodollar. It is intended for people working in banks, in dealerships, and in other financial institutions; for people running liquidity portfolios; and for accountants, lawyers, students, and others who have an interest in the markets discussed. The book begins with an introduction to what goes on in fixed-income financial markets—financial intermediation and money creation—plus an introduction to how fixed-income securities work, including vari-ous concepts of yield, the meaning and importance of the yield curve and the messages embedded in it, and the concepts and calculation of duration and convexity.

Introduction:

The money market also provides a means by which the surplus funds of cash-rich corporations and other institutions can be funneled to banks, corporations, and other institutions that need short-term money. In addition, in the money market, the U.S. Treasury can fund huge quantities of debt with ease. And the market provides the Fed with an arena in which to implement its monetary policy. This is where the money market gets the most attention, with investors throughout the world focused almost obsessively with what the Fed might do next. New instruments such as fed funds futures now make it possible to pinpoint precisely what the money market expects of the Fed. The varied activities of money market participants also determine the structure of short-term interest rates, for example, what the yields on Treasury bills of different maturities are and how much commercial paper issuers have to pay to borrow. The latter rate is an important cost to many corporations, and it influences in particular the interest rate that a consumer who buys a car on time will have to pay on his loan. The commercial paper market is also one that tends to be over-looked, despite the fact that it is twice the size of the Treasury bill market. Finally, one might mention that the U.S. money market is increasingly becoming an international short-term capital market. In it oil imports, semi-conductor purchases, aircraft, and a lot of other non-U.S. trade are financed.

Anyone who observes the money market soon picks out a number of salient features. First and most obvious, it is not one market but a collection of markets for several distinct and different instruments. What makes it possible to talk about the money market is the close interrelationships that link all these markets. A second salient feature is the numerous and varied cast of participants. Borrowers in the market include foreign and domestic banks, the U.S. Treasury, corporations of all types, the federal agencies such as Fannie Mae and Freddie Mac, Federal Home Loan Banks and other federal agencies, the financial arms of industrial corporations such as General Electric, dealers in money market instruments, and many states and municipalities. The lenders include almost all of the above plus insurance companies, pension funds—public and private—and various other financial institutions, including the mutual fund industry. And, often, standing between borrower and lender is one or more of a varied collection of brokers and dealers.

Another key characteristic of the money market is that it is a whole-sale market. Trades are big, and the people who make them are almost always dealing for the account of some substantial institution. Because of the sums involved, skill is of the utmost importance, and money market participants are skilled at what they do. In effect, the market is made up of extremely talented specialists in very narrow professional areas. A bill trader extraordinaire may have only vague notions of what the Eurodollar market is all about, and the Eurodollar specialist may be equally vague on other sectors of the market. Increasingly, however, more of today’s trading desks are staffed with generalists, who deal in a wider variety of securities on a daily basis.

Another principal characteristic of the money market is honor. Every day traders, brokers, investors, and borrowers do billions of dollars’ worth of business over the phone, and however a trade may appear in retrospect, people do not renege. It can be said that a motto of the money market, as in the fixed-income and foreign-exchange market, more generally is: My word is my bond. Of course, because of the pace of the markets, mistakes do occur, but no one ever assumes that they are intentional, and mistakes are always ironed out in what seems like the fairest way for all concerned.

One of the most appealing characteristics of the money market is innovation. Compared with our other financial markets, the money market is lightly regulated. If someone wants to launch a new instrument or to try brokering or dealing in existing instruments in a new way, he does it. And when the idea is good, which it often is, a new facet of the market is born. Moreover, the market is always changing. In the very final stages of the writing of this book, for example, the Chicago Mercantile Exchange was announcing its intention to buy the Chicago Board of Trade, merging two futures exchanges where the money market is prominently featured. Many more innovative changes undoubtedly lie ahead for the money market.

The focus of this book is threefold. First, attention is paid to the major players—who are they, why are they in the market, and what are they attempting to do? A second point of attention is on the individual markets—who is in each market, how and why do they participate in that market, what is the role of brokers and dealers in that market, and how are prices there determined? The final focus is on the relationships that exist among the different sectors of the market, for example, the relationship of Eurodollar rates to U.S. rates, of Treasury bill rates to the fed funds rate, of the repo rate to the fed funds rate, and so on.

This book is organized in a manner to enable readers with different backgrounds to read about and understand the money market. Part One contains introductory material for readers who know relatively little about the market. It is preface and prologue to Parts Two and Three, which are the heart of the book. Thus, readers may skim or skip Part One depending on their background and interests. They are, however, warned that they do so at their own peril, since an understanding of its contents is essential for grasping subtleties presented later in the book. Readers needing to gain a quick sense of particular subject matter will find the charts, supporting text, and end-of-chapter reviews useful tools. The footnotes serve as a useful reference to readers wishing to delve into topics more deeply.

Contents:

• Funds Flows, Banks, and Money Creation
• The Instruments in Brief
• Bond Valuation
• Duration and Convexity
• The Banks: Domestic Operations
• The Banks: Eurodollar Operations
• The Treasury and the Federal Agencies
• Don’t Fight the Fed! The Powerful Role of the Federal Reserve
• The Market Makers: Dealers and Others
• The Investors: Running a Short-Term Portfolio
• The Federal Funds Market
• The Repo and Reverse Markets
• Treasury and Federal Agency Securities
• Financial Futures: Bills, Eurodollars, and Fed Funds
• Treasury Futures
• Financial Options
• Eurodollars: Cash Time Deposits and FRAs
• Interest-Rate Swaps
• Certificates of Deposit
• Bankers’ Acceptances
• The Commercial Paper Market
• Bank Sales of Loan Participations
• Medium-Term Notes
• Municipal Notes
• Money Market Funds

Stigum's Money Market By Marcia Stigum, Anthony Crescenzi pdf