Bond Expert: Wednesday Outlook

Prices of Treasury coupon securities are surging as the turmoil in the world financial markets deepens and resists the best laid plans of policymakers to alter its course.Stock markets are plunging across the globe. The Japanese stock market suffered its the third largest loss ever and its steepest decline since 1987 as it crashed by 9.4 percent. The Hang Seng dropped by 8 percent and the Australian market tumbled 5 percent. European markets are down between 4 percent and 6 percent. Trading in equity futures indicates that the US markets will tumble sharply at the outset if trading were to begin now.

The UK government crafted a recapitalization program for banks but that has failed to stem the losses and restore confidence.

The ECB offered one day dollar loans and received bids for $122 billion. They filled $70 billion of the bids versus $50 billion the prior day. The rate for the funds was set at 9.5 percent which was 556 basis points higher than the prior day.

The yield on the benchmark 2 year note has slipped 7 basis points to 1.39 percent. The yield on the 5 year note has dropped 5 basis points to 2.40 percent. The yield on the benchmark 10 year note has edged 6 basis points lower to 3.44 percent and the yield on the bond has dropped 8 basis points to 3.93 percent.

The 2year/10 year spread is about one basis point wider at 205 basis points.

There is not really too much to write or say at this juncture. Confidence and trust have been shattered. Each of those is an intangible item which cannot be poked and prodded and each defies quantification and measurement.

Central bankers around the globe are working feverishly to reestablish trust and confidence but their heroic efforts bear no fruit. Each failure spawns new failure and a deeper crisis of confidence.

The system is spinning out of control and at this time it is difficult to imagine that this long running episode can resolve itself with anything other than a historic and tragic financial calamity.

Update: The Federal Reserve has just slashed the funds rate by 50 basis points and has been joined by several other central banks who have also cut rates. The statement by the FOMC recapitulates several lines from Bernanke’s speech of yesterday.

It will be interesting to see how this unfolds. Stock futures turned around in the aftermath.

The IG 11 was quoted 170/175 in the aftermath of the rate cut. It closed last night at 179.

EMU:

One FX analyst whose output I regularly review ( but who does not wish to quoted for attribution) makes some interesting points to make about Eurpean government bond markets and the EMU.

There is tension in Europe over the credit crunch/financial crisis. To this point there has not been a unified response as the Europeans mimic the US under the Articles of Confederation. The writer makes the point that tensions are such that the Intrade betting site has a contract in which you can gamble on the possibility that some country will drop out of EMU by January 2010. The odds are currently at 35 percent.

Government bond spreads in Europe reflect the tensions and strains. Since the beginning of the year Italy has widened 34 basis points versus Germany and Greece hs widened 32 basis points. Portugal has lagged Germany by 24 basis points and Ireland has lagged by 18 basis points. France and Spain has each trailed Germany by 11 basis points to 12 basis points.

It is a mixed picture for Europeans in Scandinavia. Norway has been the big underperformer as it has underperformed Germany by 38 basis points. Denmark has lagged by 14 basis points and Sweden by just 4 basis points.

I did not mention earlier that all of these spreads are for 10 year bonds.

U.K. Special Liquidity Scheme:

With world markets and the financial system teetering at the edge of a true calamity, the UK Treasury has acted to make available as much as 200 billion sterling to major UK banks. The program will  recapitalize the banking system and will keep the system awash in liquidity.

Update:  I was just reviewing the press release from Her Majesty’s Treasury and I misunderstood the monetary impact of the plan. First,to ensure system wide liquidity they will make 200 billion pounds available. Separately, if I read it properly, they will make 50 billion pounds available to the banks for recapitalization efforts.

Comments

[JasonC:]

"The ECB offered one day dollar loans and received bids for $122 billion. They filled $70 billion of the bids versus $50 billion the prior day. The rate for the funds was set at 9.5 percent"

Utter fools. Never starve a panic. Take *all* bids and fill them at the 3.75% stated rate. Can't anybody here play this game?

2008 Oct 08 10:19 AM