Fear Remains High
By Colin Twiggs
April 3, 2008 5:30 a.m. ET (9:30 p.m. AET)
The spread between the fed funds rate and 3-month T-bills remains high, warning of an unstable market. Investors continue to prefer the safety of treasury securities against significantly higher yields in the inter-bank and commercial paper markets.
Ten-year treasury yields have found support at 3.40% — the first positive sign for some time. Expect a test of the long-term moving average. The high yield differential indicates that bank margins have improved, but financial markets will continue to suffer the after-effects of the 2006/2007 negative yield differential for most of 2008.
Three-month treasury bill yields are consolidating between 1.20% and 1.50%, but the strong down-trend continues. Recovery above 1.50% would be a positive sign, while a fall below 1.20% would warn of further trouble ahead.
The spread between asset-backed and financial commercial paper signals the market's continued aversion to risk. The fed funds rate dipping below its target of 2.25% indicates that further rate cuts may be necessary.
Total asset-backed commercial paper is falling as investors shun new issues and roll-overs, forcing banks to take the debt back onto their balance sheets.
Corporate bond spreads remain high. This will impact on current earnings as well as curtailing new investment.
The 30-Year Fixed Mortgage Rate is declining after its recent spike, but the spread with 30-Year Treasury Bonds remains high — indicating continued risk aversion.
The S&P/GRA commercial real estate index shows signs of recovery in December 2007, but spreads between AAA rated (10-year) commercial mortgage-backed securities and the swap rate remain above 250 points. Further contraction of the commercial real estate market is expected.
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Bank credit growth is rising. Unfortunately we cannot tell how much is merely restoration of SIV assets to the balance sheet.
Bank consumer credit gives a clearer picture, falling to practically zero in March 2008 — typical of an economy headed into a recession.
Jonathan Wright's recession prediction model shows probability of a recession in the next four quarters is at a low 1 percent. Please note that the model looks one year ahead and the spike in late 2007 relates to the current crisis.
I would prefer to stop publishing the model, as I believe it failed to adequately predict the current recession in a relatively low interest rate environment: the 2007 reading should have reached as high as 80%. Some readers, however, have indicated that they still find the chart useful; so I continue to include it for their benefit.
You shouldn’t be worried. You should be angry.
We’ve just come off a multiyear orgy of irresponsibility
and recklessness that’s unprecedented in the history of
finance. Where was the government? Where were the regulators?
How did this happen?
~ Barry Ritholtz, CEO at Fusion IQ.
To understand my approach, please read Technical Analysis & Predictions in About The Trading Diary.