Friday, October 17, 2008
still waching for progress
Rates have declined several days in a row following the coordinated actions of central banks and finance ministeries about the globe. An early and tentative judgment is that they have lubricated the gears and the engine is beginning to crank again.
accrued interest forwarded his list of credit market tells. as did david merkel, he believes the LIBOR rate to be more important than its spread to t-bills because of the erratic movements of t-bills trading near zero yield.
Instead, watch 1-month and 3-month LIBOR rates. Both should be around 1.5-2%, based on where the Fed Funds target is. Watch Euro-denominated rates as well. A governmental guarantee of inter-bank loans would certainly drive LIBOR lower, as LIBOR is supposed to measure inter-bank lending rates. Otherwise I'd expect LIBOR to remain elevated until at least year-end.
per alea, record borrowing from the fed continues. accrued interest doesn't think this is a very useful indication. brad setser notes that one might envision a break in the clouds, though.
There is though one tiny bit of good news buried in the Fed’s balance sheet: the banks had slightly less money on deposit at the Fed on Wednesday ($261.6b) than they had on deposit over the weekend. That is why the average over the last week ($271.8b) was higher than the Wednesday total. Clearly, there were a lot of worried bankers over the weekend. And they are a bit less worried now.
treasury is continuing to fund the fed through the auction of cash management bills. here is the treasury page. this is something calculated risk has submitted as being a potential indicator of relieving pressures on the fed, but i suspect it will lag. auction size continues to be around $60bn a day.
he is also looking at a2/p2 commerical paper spreads. accrued interest again:
A much better indicator is the yield spread between over-night CP and 60-day CP. Currently over night AA-Finance CP costs firms 1.23%, according to the Federal Reserve, whereas 60-day CP costs 3.51%. Under normal conditions, those rates would be within 25bps of each other.
this won't be updated until 10am chicago time; the october 15 30-day a2/p2 spread over AA-non-financial was a near-record 440bps, while the spread between 60-day AA-financial CP and overnight was 166bps (down from 228bps in the quoted example).
he also cites the spread on AAA CMBX indeces, which are near 220bps but represent little real credit risk and should therefore trade at or under 100bps.
here's a couple of very sobering doozies - in case you've not gotten to them yet:
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