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Zoltan Pozsar on the Great Commodities Collateral Crunch in Funding Markets

The price of nickel spiked earlier this week.

The price of nickel spiked earlier this week.

Photographer: Andrey Rudakov/Bloomberg

The world’s awash with liquidity, but there are still signs of funding stress creeping in.

Here, for instance, is FRA/OIS, a key gauge of interbank funding risk, as of the close on Monday.

So what’s going on?

Zoltan Pozsar, Credit Suisse AG’s head of short-term interest rates, is back to explain. As he puts it in a note published late on Monday, the problem is that — much like triple A-rated mortgage bonds were used as collateral to secure short-term funding before the Great Financial Crisis of 2008 — commodities have been used to secure financing that could now be stressed as Russia’s invasion of Ukraine sparks major price moves.

The issue isn’t necessarily commodities being suddenly valued at zero. (Although Urals crude and other Russian assets certainly could be.) But overall funding is being constrained as massive amounts of volatility cause market players to derisk.