Redstate

Posted at 9:46am on Apr. 10, 2008 A Return to Stressed Conditions in the Credit Markets

Roller-Coaster

By blackhedd

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")

Posted in Bond market | Economy | federal reserve | liquidity crisis | money market | TAF | TSLF — Comments (5)/ Email this page » / Read More »

Posted at 9:55am on Apr. 8, 2008 Bond and Money Markets Are Creeping Back To Normal

I'm Breathing Again

By blackhedd

Noted briefly: recent aggressive actions by the Federal Reserve appear to be calming down the bond and money markets. These markets don't get nearly as much attention as the stock markets, probably because they're more arcane and harder to understand. But they're much larger than the stock markets. In general, they're the dog rather than the tail.

And they quietly went totally bananas during and after the Bear Stearns collapse, even as equity markets reacted in measured fashion. The Fed funds rate (which is usually closely correlated with a more important rate called the "general-collateral repo rate," bounced around violently from day to day. Short-term Treasury bills were in such short supply that the Treasury yield-curve steepened sharply, and for a brief period, repo interest rates on the three-month bill became negative.

In essence, the largest market participants around the world, including foreign central banks, battened down the hatches and traded as if the world were really going to end. (Their expectation was that the Fed would not be able to contain the damage and that more large firms would collapse as Bear Stearns did.) In this situation, credit was almost completely unavailable. If it had continued for any length of time, it could easily have had massive spillover effects in the real economy.

But the last three or four days have seen a significant return to near-normalcy. London LIBOR is back down to a reasonable range (indicating some revival of interbank lending). The Treasury yield curve is flattening. And the three-month Treasury rate is back to about 1.40%. The Fed's second Term-Securities Lending Facility auction last Thursday went very well. And new issues of corporate debt (Oracle, Citigroup, others) have gone quite well indeed. And retail mortgage rates are still falling.

I know this stuff is dry and technical, but I really want you all to be aware that these are extraordinary times, and that the danger to your own material well-being is real. And also that the Fed is on top of things, showing an aggressiveness that is highly unusual in central banks.

-Francis Cianfrocca ("blackhedd")

Posted in Bond market | Economy | federal reserve | money market | TSLF — Comments (30)/ Email this page » / Read More »

Posted at 7:20am on Mar. 12, 2008 Why the Stock Market Went Up 400 Points Yesterday

The Fed acts on Mortgage-backed securities

By blackhedd

After three days in a row in which the Dow Jones Industrials Average fell by more than 100 points, taking it to a multi-year low, stocks rallied sharply in New York on Tuesday. Meanwhile, the dollar rose from just under $1.55 against the euro to about $1.534, and crude oil (a hedge against dollar-inflation) fell to about $108.

As they smiled over the discomfiture of New York State Governor Eliot Spitzer, Wall Streeters reversed yesterday because of an announcement by the Federal Reserve: an unusual new asset-trading facility that, it is hoped, will stabilize markets for securities backed by mortgages that are not subprime.

You may have read the piece I posted on this subject here on Monday morning. At the Fed, they evidently read the same tea leaves and decided on a drastic course of action.

More...

Posted in Economy | federal reserve | Term Securities Lending Facility | TSLF — Comments (22)/ Email this page » / Read More »