Credit markets "Still gloomy" / Economist

Will be interesting to see how long the program "The Fed has saved us..." will continue to run in heavy rotation...... In the long run i think the Fed move was one of the worst decision and has undermined the little bit of credibility that was left .....

Es wird spannend zu sehen sein wiel lange die Phase "Die Fed hat den Markt gerettet..." noch anhält. Bisher wird sowohl das lange Ende der Zinskurve, der verfallende $, die haussierenden Rochstoffe, die gewohnt desaströsen Makrodaten und wie üblich auch die schlechten Unternehmenszahlen konsequent ignoriert...... Am schwerwiegensten ist aber wohl der endgültige Verlust der letzten Glaubwürdigkeit den besonders Bernanke noch bei einigen wenigen Naiven genossen hat.....

Credit markets "Still gloomy"
WAS that it then? From a shareholder's standpoint, it certainly looked as if the Federal Reserve had administered a miracle cure to stockmarkets with its spoonful of easy money on September 18th. Bankers began to talk of the worst being over and done with.

> Here is the perfect "Anti Spin" from Hussman Knowing What Ain't True that will be remembered after the "animal spirit" has run out of food....

> Hier sachliches von Hussman Knowing What Ain't True das wohl erst dann wieder Beachtung finden wird nachdem einige realisiert haben das die Gier mal wieder gesiegt hat.....

In the debt markets, however, a more jaundiced view prevails. Lingering pessimism—in overnight money markets right along the yield curve to long-term bonds—is likely to make the Fed's task harder as it seeks to revive the economy.

For one thing, the reaction of America's bond market to the interest-rate cut was different from previous rate-cutting cycles (see chart). Instead of falling, as they have in the recent past, ten-year bond yields rose, as investors fretted that the Fed's largesse would stoke inflation. In America and the euro zone yields came off their highs on September 25th, when weak economic data eased inflationary concerns. But economists polled by Bloomberg still expect ten-year yields in America to remain above their levels before the rate cut.

That does not bode well for American mortgage rates, which tend to rise along with long-term Treasury-bond yields. Indeed, the price of a 30-year fixed-rate mortgage has risen by seven basis points since last week, according to bankrate.com, a personal-finance website. That raises concerns about how little the Fed's rate cuts may help the housing market.
Elsewhere, banks continue to find it hard to get funding from other banks over short time-periods, because of their over-stretched balance sheets as a result of America's subprime mortgage crisis. The London Interbank-Offered Rate (LIBOR) in dollars, euros and sterling at overnight and three-month maturities remains higher than normal. Even future rates do not indicate much hope of improvement. Last week, LIBOR traders expected sterling rates to fall to 5.96% by the year-end from 6.35% today. Now traders still expect a drop, but only to around 6.16%.

Like the ten-year yields in America, higher LIBOR rates affect mortgage rates in Britain. Although mortgages are linked to the Bank of England's official rate, which has not changed since July, high-street banks partly fund their loans using LIBOR. If the rate moves up, or does not fall as much as expected, banks are likely to pass on the cost to mortgage borrowers.

Companies, too, are likely to be affected. Corporate-bond markets have re-opened since the Fed cut rates. But given the reluctance of banks to lend, those firms that need ready cash in short-term markets such as commercial paper are likely to feel the squeeze. “Those companies who last rolled over their short-term debt in July are likely to be in for a rude shock when they try to do so again in December,” says John Wraith of the Royal Bank of Scotland. Prepare for a long convalescence.

John Authers: Two views on the Fed Funds rate cut There are notes of caution - the main indices are not back to their highs, and defensive stocks have outperformed for the last week - but the cut has made stock investors a lot of money, he notes.

“Intriguingly, it has also made money for commodity investors,” he adds. The S&P GSCI non-energy commodity index is up a cool 16 per cent since the Fed cut the discount rate in August.

But the Fed was not acting for these people, Authers reminds us. “It wanted to relieve the crisis of confidence in money markets, where doubts about the quality of collateral had sent soaring the rates at which banks could raise funds.”

To look at it in two ways: First, the dollar Libor rate, at which banks lend to each other, fell by the full 50 basis points. Having touched 5.725 per cent, it is now 5.23 per cent. In asset-backed commercial paper 90-day paper rates reached 6.25 per cent and have come back down to 5.37 per cent.

So the rate cut reduced the cost of finance, bringing it back down to the levels before the crisis. This is important.

To look at it a second way, though: “Normally Libor and commercial paper are closely tied to fed funds. Both tend to be only slightly higher than fed funds, reflecting only slightly higher risks. When those spreads suddenly widened, it signalled a crisis of confidence.”

Those spreads are as wide as they were before the rate cut. In July, commercial paper traded at only 4bp above Fed Funds. That spread is now 62bp. Three-month Libor usually trades at 10 or 11bp above Fed Funds: that spread is now 45bp.

So the rate cut euphoria has not flushed the underlying lack of confidence out of the system. The money market shows banks are still fearful of ugly surprises in the next few months. Maybe that should temper the roaring equity and commodity markets.

> I don´t have heard "Don´t fight the Fed" during the last few years at times when the Fed was hiking rates ;-)

> Besonders der Spruch "Don´t fight the Fed" gefällt mir besonders gut. Komisch nur das man diesen Spruch nicht in Zeiten hört wenn die Notenbanken die Zinsen anheben ;-)