The Dysfunctional Credit Market

One of the problems with a credit crisis is that it's much harder to track fixed-income markets than it is stock markets. Name a stock or a stock index, and it's easy to see how prices reacted to every minute of the big vote yesterday. Try to find an intraday chart of T-bills, however, or credit spreads, and it's much harder. And Libor is fixed only once a day, which is about a week in market time.

Given the paucity of credit information online, John Jansen's blog is invaluable these days. Here he was yesterday afternoon:

The yield on the 2 year note rotated through a mini interest rate cycle as its yield tumbled 37 basis points to 1.73 percent.

It's a powerful point: the movements on Treasury bonds yesterday were larger than the average rate cut. This morning, the yield on the 2-year had "climbed 13 basis points to 1.79 percent", implying that at the official close yesterday was even lower than Jansen had indicated, at 1.66%.

Later this morning, Jansen dropped an even more eye-popping datapoint: the Fed funds rate, which is targeted at 2%, opened "at 6 ½ to 7 percent" before starting to move downwards -- something Jansen's "money market mole" calls "the most dysfunctional market that he has witnessed in 20 years".

And this is even scarier:

Trading today has been limited to overnights with virtually no term trades.

Some small part of that might be due to the fact that today's the last day of the quarter; things might pick up a little tomorrow. Or, on the other hand, they might not.

So I'm glad that broad stock-market indices are up 4% today. But looking at the credit markets, things are still very bad indeed. Remember, the equity markets have been overoptimistic during the entire history of this crisis. They're not really to be trusted.

Comments

[vagrant_joe:]

Hi Felix, I enjoy reading your articles although I don't always agree with them. In this instance, maybe we could be more clear as far a WHO's credit is drying up.

By saying that credit in general is drying up, we ignore very interesting data issued a week and a half ago from the Fed showing EXACTLY the OPPOSITE
-as in Mark Perry's article earlier today (seekingalpha.com/artic...).

Someone is lying. Either the data is wrong (from the FED) or Paulson et. al. is wrong. Someone's shoveling crap and I wouldn't be surprised to see it be either one.

Close to me, my brother & some of my friends have had no problem getting approved for home-loans recently and my ex-girlfriend just got approved for a $350k loan -even though she's only been working at her job for 8 mos. with no prior history in the field (she's a nurse). Not bad for a dried up credit market with gears that have ground to a halt and no-one trusts anyone anymore.

I don't see credit drying up. I see the Fed pumping a TON of money into the system, pulling off these bogus "swaps" with other central banks to lull folks into thinking the currency isn't being devalued at the same time, and I see more and more people that have worked themselves into a position of becoming uncreditworthy (defaulting on home loans and not paying credit card bills had that sort of consequence way before Paulson yelled "fire" in a crowded building).

So, many banks have worked themselves into that same uncreditworthy situation that many of their borrowers had. It happens. I wouldn't lend a buddy money again if he didn't pay me back the first time & did the same thing with 11 other buddies. And so it is between banks -maybe. Either they get their life/business together and make some cuts in the surpluses of their lives (inflated bonus's, branches on every corner, fancy lighting and fancy buildings) or they declare bankruptcy (like their customers) and someone else gets those branches, lighting, and buildings. Life goes on. Nothing to see here. Just a few folks waving socialist flags and having a little parade -hey, there's my congressman... that bastard...!

2008 Sep 30 03:20 PM

[rogersails:]

I've got some money to help the banks with their issues, but I'd rather stuff 100's under my mattress than give it to dysfunctional bank for a lousy 2% return. Offer me 5% and I'll think about it.

2008 Sep 30 03:38 PM

[Larry House:]

I don't trust much of anything right now, but I am putting some money in PTTDX to see if Bill Gross can make some money out of this mess. The last figure I saw put the cash level at over 80% in the fund. He has a few billion to work with there, and I am willing to bet that he will find some good buys over the next several months. I view this as a safety move (time will tell), and I don't think stocks will return any more than bonds over the next several months to few years. My bond picking hasn't been so good lately (LEH), so I will see what Bill can do.

2008 Sep 30 03:39 PM

[Smarty_Pants:]

vagrant_joe is right. Credit from the hometown bank is still available if it is well run and you are a good credit risk.

The problem is the super-leveraged bank model used by Wall Street where they borrow billions of 28 day money at 2% to loan out for 30 years at 6%. Everything's fine and dandy until borrowers start defaulting and the collateral isn't worth the loan balance. Now the banks have to find a way to repay those 28 day notes coming due, write down the bad loans, and still maintain their reserves.

The only possible way once a sufficient number of defaults occur is to borrow even MORE short term money hoping to recover before it comes due. As the shampoo bottle says...lather, rinse, repeat.

Borrow short term, lend long term to undeserving borrowers and it's no surprise that they are in financial straights.

Don't buy the media propaganda about the economy seizing up if the big banks go under. It's all hot air meant to fear-monger.

2008 Sep 30 04:18 PM

[Britishsteel:]

people vote against this bailout or you will be reduced to poverty not seen since the great depression, this was on kudlow tonite: 9/30/08

"Paulson and Bush threatened to veto the legislation if there was an explicit prohibition of transfers from foreign banks to an American subsidiary."

THE ASSETS DO NOT EVEN HAVE TO BE AMERICAN MORTGAGE ASSETS - THEY CAN BE AN OFFICE TOWER IN SHANGHAI!

YOU ARE GOING TO GET FLEECED FOR HUNDREDS OF BILLIONS OF DOLLARS IF THIS BILL PASSES - THAT MONEY IS GOING TO GO IMMEDIATELY OUT OF THE COUNTRY!




SEC. 112. COORDINATION WITH FOREIGN AUTHORITIES AND CENTRAL BANKS.

The Secretary shall coordinate, as appropriate, with foreign financial authorities and central banks to work toward the establishment of similar programs by such authorities and central banks. To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending financing to financial institutions that have failed or defaulted on such financing, such troubled assets qualify for purchase under section 101.


votenobailout.org/

2008 Oct 01 08:47 AM

[venividivici:]

You are dead right about the equity markets, Felix. They live in a world of their own, Fantasyland.That could well end in a horror movie in the long run.

2008 Oct 01 11:34 AM

[JasonC:]

RogerSails - you can get up to 174% interest in National City notes with 3-5 months to run. You can get 21% for 5 years from Morgan Stanley on its notes. You can get 7.5% on GE 3 year notes rated AAA.

If you aren't lending on financials, sorry, but it isn't the rates on offer. Just go to the corporate bond markets and you can get epic rates.

But oh, the FDIC isn't going to guarantee it, you have to actually believe the entity you are lending to is good for it. Demanding high rates *plus* no risk simply isn't going to happen in the material universe. High rates can only be paid by issuers by taking risks.

2008 Oct 01 01:17 PM