Monday, December 24, 2007

Spreads, Credit Fears and Principal Conservation

The following chart tracks the yield of 3-month US Treasury bills; recessions are marked in gray (click to enlarge). With the exception of 1984-86 when inflation came down rapidly due to plunging oil prices, every time T-bill yields dropped significantly the US economy entered a recession, or was already in one. The reason is that investors facing recessions get out of riskier assets such as stocks and corporate bonds and park their cash in T-bills, instead.

Three Month T-Bill Yield Chart:FRB St. Louis

The same thing is happening today, but with an important twist. The current credit crisis is targeting specifically the short end of the yield curve. The failure of the SIV - ABCP and other structured finance markets has increased demand for the safest possible short-term instruments, i.e. T-bills. While 3-month bills are now at 2.85%, bank certificates of deposit (CDs) with the same maturity are at 5.00%, 3-month LIBOR (the rate at which banks lend to one another) at 4.86% and commercial paper issued by financial institutions at 4.90%.

The spread between T-bills and such rates is the main credit fear indicator for money markets. The next chart shows the spread between 3-month bank CDs and T-bills (click to enlarge). It is at 2.15%, the highest in over 20 years.

Data: FRB St. Louis

However, even this big spread understates the magnitude of the current crisis because it is in absolute terms, not relative to current interest rates. It is one thing for spreads to be at 2.15% when market rates are at 10% and very much another when they are at 3%. For proper perspective, the next chart tracks the spread as a percentage of T-bill rates (click to enlarge).

Data: FRB St. Louis

The ratio is now at the highest point in at least 43 years (75%), meaning that investors are so concerned about getting their money back after three months that they are willing to forgo a record 75% more income available through CDs than from T-Bills (2.15%/2.85%). This is not mere credit fear, but full-out principal conservation mode.

Effectively, the money market has ceased functioning normally. Banks rely instead on borrowing unprecedented amounts from central banks and this explains the ECB's decision last week to provide "unlimited" liquidity and the Fed's announcement that it will continue its TAF operations for as long as it takes. The central banks have drawn a line in the sand, betting that they can ultimately win the battle against fear.

This is a very fragile state of affairs. Despite the rhetoric, even central banks do not posses enough resources to fund the entire system and one more wave of major credit-related news could easily wipe out the line.

15 comments:

Shawn said...

Hellasious,

That Raio thing is a GREAT thought, putting things in perspective.

Somehow the stock market is in a different world. Your stock analysis was good, but there is still a mystery cannot be explained: Overall SP500 earnings are down y-o-y and q-o-q, and it will be down next quarter too.

But somehow SP500 and DJIA are very close to all time highs as if nothing has happened.

I am not talking a few stocks holding up. I am looking at the big picture of all earnings combined.

Hellasious said...

Re: Stocks

Somebody's buying.. the latest suspect du jour is sovereign wealth funds. PPT writ large and in flashing neon lights. Who needs a secretive US-based PPT conspiracy when the governments of China, Singapore, the Gulf States and who knows who else are OFFICIALLY and PUBLICLY buying large slices of US companies?

And that's just the stuff that is being announced, the big stakes. I bet there are many more smaller portfolio transactions taking place under it all.

..and if their govts. are buying into US stocks, why shouldn't wealthy but novice individual speculators from these countries be buying also? Think Arabs, Indians, Chinese.. with new-found millions and next to zero experience.

It may be that there is a huge distribution operation unfolding here. If this is so, a lot of very angry foreigners are going to be left holding the bag.

Watch volume patterns - e.g. in the past 18 mos. DJ went from 11.000 to 14.000 but average volume (# of shares traded daily) was actually lower than the previous 1-2 years. And lately volume has been expanding on the down days and contracting on the up days.

But I am sure a lot of people see this already...

Best
H.

E. Cartman said...

Hellasious, great blog--how do you make those kinds of graphs in FRED? ie, graph a difference between two FRED datasets?

patfla said...

Actually it appears that there's been a sufficient (ly large) amount of selling (of 3-mth Teasury bills) to send the rate back up by something like 30 bp.

This is very big. And serves to move the 'TED spread' back in the 'safe' direction.

http://online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_h_dtabnk&symb=UST3MO&page=bond

Set

Time = 1 Month
and
Frequency = Daily

So the question now is: who is selling?

Since it's Dec-24 one might say this is a passing phenomenon (low traffic day). The thing to do though is watch the number for days following Christmas and into early Jan.

But, if you're like me, you're watching it every day, multiple times.

pat

AJ said...

Hellasious,

Thank's, looks like we can toss the old year end window dressing hypothesis out the window in this case, and same for any simple liquidity preference unless the latter = forced 'preference'.

Happy holidays to you, family and friends.

Genesis said...

Its all a confidence game.

The problem here is that the confidence game depends on "it all being contained to subprime."

But, as anyone with more than a 20 IQ knows, its not.

Its also auto loans, credit cards, Option ARMs (the next big implosion) and more.

The "liquidity game" is really just one big scam. There has been no actual net injection. At all. Go look at ALL the data. You'll see it.

But that's not what the media reports.

And they DO know better.

Is intentional deception punishable if "the media" engages in it? Probably not.

But how well will that work out for you if you're one of the bagholders?

You know the old saying - if you can't identify who the bagholders is.... its YOU!

Carl said...

When the markets collapse "a lot of very angry foreigners" could be a much larger problem than is generally appreciated. U.S. companies have many properties in other countries and really angry foreigners have been known to seize our stuff before. Just something to consider.

Hellasious said...

Re: making charts in FRED

You can make combination charts by choosing other series in the space provided at the bottom of the page. Or you can downlowd the data sets in Excel and chart on your own.

Best
H.

wheelchairs[ said...

iVANTEE is a professional outsourcing consulting and management company which focuses on outmanaging service
include software outsourcing.website development outsourcing
webサイト 開発ソフトウェア 開発
Laser marker,Laser Marking Machine,Laser Engraver
MCSEflexible coupling

Anonymous said...

Shanghai Fashionorganic makes
Bamboo Clothing,Bamboo fabric ,
Hemp clothing,Organic Cotton,
Organic cotton clothing,Hemp Sandal
Soybean clothingVinyl Bag
Vinyl Packaging
laser engraver which is also the perfect choice for stamp making.cnc router
Super file encryption,folder encryption,A powerful and easy-to-use program for encrypting and protecting your data

Anonymous said...

We review the bestonline poker bonus
online poker rooms
online poker guide
poker room reviews
poker sites
and so on.
We offer the highest quality flowers melbourne from around Australia at excellent prices
onlinecasino.com - online casino reviews
with best online casino,
usa online casino, strategy, news!

coco said...

nikedao
妮可鞋岛
adidas
nike
运动鞋nikedao
妮可鞋岛
adidas
nike
运动鞋nikedao
妮可鞋岛
adidas
nike
运动鞋

Anonymous said...

情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣,情趣,情趣,情趣,情人歡愉用品,情趣用品,AIO交友愛情館,情人歡愉用品,美女視訊,情色交友,視訊交友,辣妹視訊,美女交友,嘟嘟成人網,按摩棒,震動按摩棒,微調按摩棒,情趣按摩棒,逼真按摩棒,G點,跳蛋,跳蛋,跳蛋,性感內衣,飛機杯,充氣娃娃,情趣娃娃,角色扮演,性感睡衣,SM,潤滑液,威而柔,香水,精油,芳香精油,自慰,自慰套,性感吊帶襪,情趣用品加盟,情人節禮物,情人節,吊帶襪,成人網站,AIO交友愛情館,情色,情色貼圖,情色文學,情色交友,色情聊天室,色情小說,七夕情人節,色情,A片,A片下載,免費A片,免費A片下載,情色電影,色情網站,辣妹視訊,視訊聊天室,情色視訊,免費視訊聊天,視訊聊天,美女視訊,視訊美女,美女交友,美女,情色交友,成人交友,自拍,本土自拍,情人視訊網,視訊交友90739,生日禮物,情色論壇,正妹牆,正妹,成人網站,A片,免費A片,A片下載,免費A片下載,AV女優,成人影片,色情A片,成人論壇,情趣,免費成人影片,成人電影,成人影城,愛情公寓,色情影片,保險套,舊情人,微風成人,成人,成人遊戲,成人光碟,色情遊戲,跳蛋,按摩棒,一夜情,男同志聊天室,肛交,口交,性交,援交,免費視訊交友,視訊交友,一葉情貼圖片區,性愛,視訊,嘟嘟成人網

愛情公寓,情色,舊情人,情色貼圖,情色文學,情色交友,色情聊天室,色情小說,一葉情貼圖片區,情色小說,色情,色情遊戲,情色視訊,情色電影,aio交友愛情館,色情a片,一夜情,辣妹視訊,視訊聊天室,免費視訊聊天,免費視訊,視訊,視訊美女,美女視訊,視訊交友,視訊聊天,免費視訊聊天室,情人視訊網,影音視訊聊天室,視訊交友90739,成人影片,成人交友,美女交友,微風成人,嘟嘟成人網,成人貼圖,成人電影,A片

Anonymous said...

A片,aio,av女優,av,av片,aio交友愛情館,ut聊天室,聊天室,豆豆聊天室,色情聊天室,尋夢園聊天室,080聊天室,視訊聊天室,080苗栗人聊天室,上班族聊天室,成人聊天室,中部人聊天室,一夜情聊天室,情色聊天室,情色視訊,美女視訊,辣妹視訊,視訊交友網,免費視訊聊天,視訊,免費視訊,美女交友,成人交友,聊天室交友,微風論壇,微風成人,sex,成人,情色,情色貼圖,色情,微風,聊天室尋夢園,交友,視訊交友,視訊聊天,視訊辣妹,一夜情,A片,A片

情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣,情趣,情趣,情趣,情趣,情趣,情趣,情趣,按摩棒,跳蛋,充氣娃娃,情境坊歡愉用品,情趣用品,情人節禮物,情惑用品性易購,A片,視訊聊天室

免費A片,AV女優,美女視訊,情色交友,免費AV,色情網站,辣妹視訊,美女交友,色情影片,成人影片,成人網站,A片,H漫,18成人,成人圖片,成人漫畫,情色網,日本A片,免費A片下載,性愛

A片,色情,成人,做愛,情色文學,A片下載,色情遊戲,色情影片,色情聊天室,情色電影,免費視訊,免費視訊聊天,免費視訊聊天室,一葉情貼圖片區,情色,情色視訊,免費成人影片,視訊交友,視訊聊天,視訊聊天室,言情小說,愛情小說,AIO,AV片,A漫,av dvd,聊天室,自拍,情色論壇,視訊美女,AV成人網,色情A片,SEX,成人論壇

情趣用品,A片,免費A片,AV女優,美女視訊,情趣用品,A片,免費A片,日本A片,A片下載,線上A片,成人電影,嘟嘟成人網,成人,成人貼圖,成人交友,成人圖片,18成人,成人小說,成人圖片區,微風成人區,成人文章,成人影城,情色,情色貼圖,色情聊天室,情色視訊色情網站,一葉情貼圖片區,做愛,性愛,美女視訊,辣妹視訊,視訊聊天室,視訊交友網,免費視訊聊天,美女交友,做愛影片

av,情趣用品,a片,成人電影,微風成人,嘟嘟成人網,成人,成人貼圖,成人交友,成人圖片,18成人,成人小說,成人圖片區,,情色,情色貼圖,色情聊天室,情色視訊,情色文學,色情小說,情色小說,色情,情色電影,aio,av女優,AV,免費A片,日本a片,美女視訊,辣妹視訊,聊天室

情趣用品.A片,情色,情色貼圖,色情聊天室,情色視訊,情色文學,色情小說,情色小說,色情,寄情築園小遊戲,情色電影,色情遊戲,色情網站,聊天室,ut聊天室,豆豆聊天室,美女視訊,辣妹視訊,視訊聊天室,視訊交友網,免費視訊聊天,免費A片,av女優,av,成人電影,成人,成人貼圖,成人交友,成人網站,自拍,尋夢園聊天室

said...

runescape money runescape gold runescape money buy runescape gold buy runescape money runescape money runescape gold wow power leveling wow powerleveling Warcraft Power Leveling Warcraft PowerLeveling buy runescape gold buy runescape money runescape itemsrunescape accounts runescape gp dofus kamas buy dofus kamas Guild Wars Gold buy Guild Wars Gold lotro gold buy lotro gold lotro gold buy lotro gold lotro gold buy lotro gold runescape money runescape power leveling runescape money runescape gold dofus kamas cheap runescape money cheap runescape gold Hellgate Palladium Hellgate London Palladium Hellgate money Tabula Rasa gold tabula rasa money Tabula Rasa Credit Tabula Rasa Credits Hellgate gold Hellgate London gold wow power leveling wow powerleveling Warcraft PowerLeveling Warcraft Power Leveling World of Warcraft PowerLeveling World of Warcraft Power Leveling runescape power leveling runescape powerleveling eve isk eve online isk eve isk eve online isk tibia gold Fiesta Silver Fiesta Gold
Age of Conan Gold
buy Age of Conan Gold
aoc gold

呼吸机
无创呼吸机
家用呼吸机
呼吸机
家用呼吸机
美国呼吸机
篮球培训
篮球培训班
篮球夏令营
china tour
beijing tour
beijing travel
china tour
tibet tour
tibet travel
computer monitoring software
employee monitoring