Monday, October 20, 2008
continuing credit watch
"Disappointment" -- That is how my money market trader contact described the action in his market today. There was virtually no follow through buying from Friday nor did the sanguine view of other spread sectors leak into his market.
I had mentioned on Friday that he had observed some chunky flow in which real money was moving in size from very short space into the one month and two month part of the money market curve. Tomorrow is a new day and maybe that flow renews then.
that's a pity, as there are other signs of continuing stress. agency debt is, despite being now a full-faith-and-credit instrument, widening vis-a-vis treasuries. it was implied this morning in the hayman "darwinian flush" letter that there is a good reason for this:
Now that the Fed and Treasury have basically guaranteed that the sun will come up in the West, there is a new problem showing itself. Below, Fannie and Freddie spreads to US Treasury bonds have hit their highest levels EVER today. Now that they are nationalized and explicitly guaranteed, shouldn’t they trade at the narrowest spread ever? The bottom line is that there is no money in the global system to buy this stuff. Globally, investors are tapped out, and the leverage in the system has to come down. We have no idea how this is supposed to happen in an “orderly” fashion. What this means is that the cost of obtaining a mortgage is going up.
indeed -- it's not being arbitraged because no one can in size -- as doug noland called it, we are witnessing the end of the arb game.
still, despite lingering illiquidity, jansen is optimistic that a return to "normalcy" may be underway.