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

• Felix helps us understand how financial conditions have tightened since the Fed’s rate cut.

• On the ground at the inaugural DC Privacy Summit, Casey shares what she’s hearing.

• Ben explores some of the benefits/hurdles of tokenization after chatting with a Ripple exec.

Rates went up after the Fed cut, not down

If I were to tell you that since the Fed’s rate cut of 50 basis points in September, financial conditions tightened (as opposed to loosened), would you believe me?

Well, that’s exactly what has happened. And for those not in the fixed income weeds, it might be a bit confusing how this could have occurred. So let’s break it down.

1. The rates complex

When the FOMC decides to lower interest rates, they’re actually just lowering one of what comprises many interest rates that make up the yield curve. Specifically, they are lowering the interbank overnight rate, otherwise known as the federal funds rate. As you move further out in duration on the yield curve, the less direct control the FOMC has on what that rate is, and the more it is controlled by market forces:

2. Priced for aggressive slowdown

The FOMC can attempt to influence the long-duration parts of the curve through guidance on the path of rates, however. Through this combination of guidance and a summer of soft economic data, the market then moved to price in one of the most aggressive cutting cycles in history:

We effectively were priced to see the fed funds rate reach 3% by the second half of 2025. From this aggressive pricing, the long end of the yield curve moved significantly lower to price in positioning that looked like a recession. 

3. The 50bps cut as a trigger

From there, the Fed moved to cut 50bps, which was only priced at roughly 50% odds. This aggressive move helped quell concerns that the Fed was behind the curve and was risking a recession from happening if it moved too slowly and cut by “only” 25bps. 

With the context of the near-recessionary pricing in the long end of the yield curve in mind — paired with an onslaught of positive economic data throughout September and October — something weird happened. 

As the Fed cut the fed funds rate by 50bps, nearly every other maturity on the yield curve actually increased, as seen below:

So despite the 50bps cut to the fed funds rate, the vast majority of the yield curve is substantially higher than it was a month ago. 

4. The economy operates on the long end 

Most borrowing in the economy occurs at the long end of the yield curve as opposed to the short-term money market rates. Therefore, when the price of borrowing on the long end increases, financial conditions tighten, generally speaking. And so, with this recent surge in long bond yields since the 50bps cut, we have seen financial conditions actually tighten. 

Term premia has increased, reflecting an increase in opportunity cost for borrowing on longer durations vs. short:

Also, 30-year mortgage rates have actually increased since the 50bps cut, despite the narrative that rate cuts would lead to lower mortgage rates:

This led to the mini mortgage refinancing wave we saw peaking during the week of the FOMC cut. It has decreased ever since, given the opportunity cost to refinance has gotten less alluring as mortgage rates have risen:

And so completes our journey of mechanically unpacking how, despite a cut in the federal funds rate, aggregate borrowing costs have actually increased of late. It’s crucial to look at the broad economy and not just the overnight rate that the Fed talks about.

— Felix Jauvin

The number of percentage points that separate Donald Trump and Kamala Harris in several recent polls. 

Trump leads Harris 48% to 46% in a new CNBC survey and has a 47%-to-45% edge over the VP in a Wall Street Journal poll. There’s also a HarrisX/Forbes poll showing the spread at 51% for Trump and 49% for Harris, when considering voters likely leaning toward a candidate.

We noted yesterday the poll Harris was leading in (also by two points, at 48% to 46%) from University of Massachusetts Amherst.

The bottom line is that it’s a toss-up at this point. As we’ve covered in recent weeks, the Nov. 5 election outcome could impact the trajectory of the crypto space in a major way…or not as much as many might expect. Only time will tell.

Hello from Washington DC! I took a quick trip to the nation’s capital for the inaugural DC Privacy Summit, a small event focused on exploring the intersection of DeFi and the law. This topic has been increasingly interesting in the post-Tornado Cash sanctions world. 

I’ll be sitting down with the Coinbase privacy team this afternoon, so stay tuned for details from that conversation in tomorrow’s newsletter. But for now, here are some highlights I’ve heard so far: 

• There’s a high demand from non-illicit actors to interact onchain while maintaining privacy and adhering to regulations. As Zac Cole, co-founder of 0xbow said, the idea behind the infrastructure he created came from trying to give people the “framework and methodology” to interact with onchain systems “without the fear of going to jail.” 

• In terms of regulations, there is a long way to go (at least in the US). Working with policy makers to get to a point where code — like Tornado Cash — is not treated as a financial institution has been an uphill battle, several speakers said Thursday. 

• There are regulatory gaps in the US that make compliance difficult. Contrary to popular belief, onchain personal data is subject to privacy regulations, but determining what makes data “personal” is not always easy or clear. There are currently no laws that explicitly pertain to what kind of data can be stored onchain, which adds an additional obstacle. 

• On this latter point, Ameen Soleimani, a strategic adviser to 0xbow, said regulators are typically not motivated to act until something bad happens. His team has had more progressive conversations internationally. “The Swiss understand privacy,” he said. 

That’s all for now. Keep an eye on Blockworks.co and your inbox for more updates to come.

— Casey Wagner

You may have read some of my observations from the RWA Summit yesterday.

Changing the rails on which a portion of the world’s hundreds of trillions of dollars worth of assets reside is of course a fascinating prospect, even if it takes many years to play out.   

The event kicked off on the same day the Financial Stability Board (FSB) published a report on the implications of tokenization in terms of — you guessed it — financial stability. 

We know some of the cited benefits of tokenization are around creating efficiencies and broadening investor access to various assets. But those “have yet to be fully proven, may not be uniquely achievable through tokenization, and may involve trade-offs that might negate the benefits,” the FSB noted.

Fractionalization mechanisms (like securitization) already help investor access to certain assets, for example. Atomic settlement may increase liquidity demands on market participants, the FSB report explains. Then there’s the challenge of scaling adoption, which the potential gains of tokenization are likely to depend on.

The bottom line, the FSB says, is that there is likely to be a blending of tradition and blockchain systems, with the latter used for “asset classes for which the cost-benefit trade-off for tokenization is most clear,” the organization notes.

That jives with a takeaway from my conversation with Ripple’s James Wallis at the RWA Summit: Fulfilling the big projections for this category will come down to whether institutions see enough value in the use cases that emerge.

“It really is that simple,” Wallis said. “It sounds obvious, but if you have an existing fund in the traditional market and you want to tokenize it, why would you do that? What is the benefit? So people are working through that.”

The FSB report also notes the regulatory uncertainties in this segment. Wallis did too. 

“The traditional institutions always have one eye on the regulatory and the risk,” the Ripple executive said. “They’re always thinking, ‘If I pick XYZ asset class, what are the rules of the road and how would I do that on a blockchain? How do I ensure a suitable level of privacy?’” 

Ripple — as it seeks to soon launch its own stablecoin — is taking a collaborative approach with regulators (in this case the NYDFS), Wallis said. Many of the big institutions Ripple is chatting with about tokenizing assets on the XRP ledger work closely with them too.    

“They have to get comfortable,” he said. “It’s not Ripple pushing anything, it’s not the client pushing anything. It’s like, let’s figure this out together.”

To read my full Q&A with Wallis, check Blockworks.co.

— Ben Strack

• Bitcoin’s price was at roughly $67,600 by 2 pm ET Thursday — up 1.5% from 24 hours prior. Ether, meanwhile, was at about $2,520 — essentially flat over that span.

• Tesla on Wednesday reported holding $184 million worth of digital assets, as of Sept. 30, which is the same amount it held in the prior quarter. The company, which saw its third quarter gross margins rise to 19.8%, watched its stock price rise nearly 21% on Thursday, as of 2 pm ET.  

• Crypto asset manager CoinShares is set to put its name on the Valkyrie crypto ETFs it acquired earlier this year. That comes as the Europe-focused firm said Tuesday it had established a New York office to “strengthen the company's presence in the world's largest financial market.”

• US-listed spot BTC ETFs brought in net inflows of $192 million on Wednesday after its seven-day positive flow streak snapped the day prior. BlackRock’s iShares Bitcoin Trust (IBIT) reeled in $318 million on its own, while the most outflows ($99 million) came from the bitcoin fund offered by Ark Invest and 21Shares. Meanwhile, ETH ETF flows were essentially flat on Wednesday. 

• We’re guessing you enjoy Forward Guidance, and maybe some other Blockworks newsletters too. Well, Blockworks co-founder Jason Yanowitz revealed Thursday that the company bought a Web3 newsletter brand, so stay tuned for updates.