A Return to Stressed Conditions in the Credit Markets
Roller-Coaster
By blackhedd Posted in Bond market | Economy | federal reserve | liquidity crisis | money market | TAF | TSLF — Comments (5) / Email this page » / Leave a comment »
Noted briefly this morning: the last several days have seen a return to stressed conditions in the bond and money markets, after a week or so of relative peace and quiet. The Treasury yield curve has bull-steepened again, indicating too much demand for short-dated Treasury debt.
The trigger for the disquiet was the Fed’s Term Auction Facility, which sold $50 billion in 28-day debt on April 7. The “stop-out” rate was unexpectedly high, which suggests that there are people out there who are short of liquidity.
Today, the New York Fed holds its third Term-Securities Lending Facility auction, which will be closely watched for signs that will confirm Monday’s results or not. And the market may react strongly in either direction.
With this report, I know I risk overemphasizing rapidly-shifting short-term behavior in the credit markets, that is ordinarily only of technical interest. But there is a larger theme: these markets underpin the real economy, and as long as they remain directionless and on hair-trigger alert, we can’t really get back to business as usual.
If anything is pushing us deeper into recession, this is it.
-Francis Cianfrocca ("blackhedd")
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"If we want to take this party back, and I think we can someday, let’s get to work." – Barry Goldwater
http://www.bloomberg.com/apps/news?pid=20601087&sid=akVfP6K8sz3k&refer=h...
And should we be worrying even more? :>)
Lloyd Blankfein made the remarks you mention at a Goldman Sachs shareholders meeting. He obviously knows as much or more about the current state of the capital markets as anyone does. But is he going to give a totally straight story in that forum? I couldn't tell you.
Goldman do appear to be aggressively positioning for a return to normal conditions. While everyone else is de-leveraging, they've said they do not intend to use less leverage in their positions going forward. If they're right, they win very, very big. If they're wrong, splat! Goldman stock is down ten points in two days, by the way.
I would say that the stock markets have reacted to the ongoing financial distress in a generally over-optimistic fashion. Bond and money markets have done the opposite.
Washington Mutual announced yesterday that they are out of the wholesale mortgage business. They will continue to offer mortgages thru their internal operations, but no more brokering.
This is a pretty big deal for several reasons...
1. WAMU was a pioneer in option arms, and they portfolioed most of them (they did the servicing).
2. Their mortgage portfolios have taken some big hits lately and they will likely take more and bigger hits.
3. WAMU is a typically an A-paper/alt A lender, little or no subprime.
Bottom line, some big players are exiting the wholwsale/correspondent mortgage business. This will tighten the credit market in housing in a big way because depository banks typically make loans as a service to their best customers and make their money servicing those loans. Their credit standards tend to be extraordinarily high and they typically only make loans t people who don't much need the money.
This is not a good indicator for the credit markets or the housing industry in general.
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CongressCritter™: Never have so few felt like they were owed so much by so many for so little.
What is not being said enough is with the weakening USA greenback, International Finance of our deficits is drying up and thus hurting the USA Credit Markets by keeping needed new capital away.
The money is flowing to Europe now, and no longer to us. The pro-Deficit Spending Chickens are Coming Home to Roost.
With USA banks cutting back significantly on new loans. We will go into a recession in 2008 which will assure Obama is elected president in November.