- MarketBeat (WSJ Blog) – A Tale of Two Credit Markets
The 16-month nightmare that is the credit markets has improved from time to time, in fits and starts, but it has not looked better than it has now in a long time. It’s too bad it still looks terrible. Right now there are two credit markets: The one where the Fed or some other agency has intervened, and the one where they have not. The latter is in terrible shape; the former is getting better, but largely through the force of the Fed’s actions and not much else. The various acronyms that the Federal Reserve has conjured up have provided support to a handful of these markets, such as in Libor and other short-term lending areas, and in the markets for mortgage-backed securities and commercial paper. Issuance in the CP market has rebounded in recent weeks, but the Fed is directly responsible for this, buying up scores of securities through its commercial paper lending facility (see chart). That’s the good part. However, those markets that have not been backstopped by one federal agency or another still reflect a lack of resolve among lenders that those they lend to will pay their debts.
Comment We have long argued that the credit markets can be divided into two parts, medicated markets and non-medicated markets. The medication is government intervention.
We detailed this in our November 20 conference call (handout, audio, transcript) and in our November 18 comments:
Further, as we have been highlighting, LIBOR and commercial paper are what we called “medicated markets.” Government involvement (medication) is so large in these markets that it is almost questionable whether they can still be considered markets. Who is buying term commercial paper other than the Federal Reserve? If investors are not buying, is it still a market? Over half the banks that report LIBOR are receiving government assistance (marked in red in the table above), and they are being told publicly to “do something” about the high level of LIBOR. Furthermore, with over $1 trillion in Term Auction Facilities (TAF) and swap agreements designed to manipulate LIBOR, can we honestly consider this a freely traded market?
Given the high level of manipulation from the Federal Reserve/Treasury, we believe it is impossible to say if these “markets” are getting better. Only when government involvement subsides and these rates can stand on their own can we say things are getting better. Currently, these markets are a long way from this happening.
- The Telegraph (UK) – Ambrose Evans-Pritchard: BIS warns of collapse in global lending
The City of London has suffered a dramatic collapse in its core business as global lending falls at the steepest rate since records began, according to new figures from the Bank for International Settlements (BIS).
In its quarterly report, the BIS warned the US Federal Reserve, the Bank of England and other central banks that near-zero interest rates and emergency monetary stimulus may come at a cost. By opening the cash spigot, the authorities risk displacing the money markets and may “discourage banks from lending to other banks”. The money markets are a crucial lubricant for the financial system, but they cannot function if rates fall too low. The sector can wither away, as Japan discovered during its “Lost Decade”. The BIS also hinted that the European Central Bank and Sweden’s Riksbank may have blundered by raising rates this year to contain the oil shock. It said short-term energy spikes have no lasting effect on inflation or wage deals.