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The Replacement of Safe Assets

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The Replacement of Safe Assets

Evidence from the U.S. Bond Portfolio

Federal Reserve Board,

5 min read
5 take-aways
Audio & text

What's inside?

Mark Twain’s observation that “history doesn’t repeat itself, but it does rhyme” could apply to the financial sector.

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Editorial Rating

7

Qualities

  • Analytical
  • Background
  • Engaging

Recommendation

Highly rated bonds are at the heart of Wall Street’s business. Few transactions would be possible without the collateral and leveraging possibilities that highly liquid money-like instruments offer. With central banks vacuuming up the best debt issues, from where are financial institutions sourcing their bonds? Economists Carol Bertaut, Alexandra Tabova and Vivian Wong of the Federal Reserve Board offer some challenging insights into the “safe” securities that have replaced the mortgage bonds that triggered the 2008 crisis. getAbstract recommends this dense but intriguing analysis of the changing composition of US investors’ bond portfolios.

Summary

Financial firms need a steady supply of highly rated bonds to use as collateral or in leveraging. When home governments reduce the supply of such securities, financial firms meet the demand by creating “safe” assets. An analysis of Treasury data on the bond holdings of US financial institutions supports the relationship between the available supply of US government securities and bond issuance by financial firms. Before the 2008 crisis, US financial institutions met shortfalls by issuing asset-backed securities (ABS) and, particularly, mortgage-backed securities...

About the Authors

Carol Bertaut, Alexandra Tabova and Vivian Wong are economists at the Board of Governors of the Federal Reserve System.


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