The Short View: Money market
The Short View: Money market
By John Authers, Investment Editor
Copyright The Financial Times Limited 2007
Published: August 20 2007 19:43 | Last updated: August 20 2007 19:43
The stock market has got the US Federal Reserve’s message. The money market has not. Unfortunately, the message was intended for the money market.
Stocks “bounced” after the Fed’s Friday decision to cut its discount rate, making it easier for banks to borrow. This was not surprising. Historically, the discount rate – governing the rate at which the Fed lends to banks – has moved less frequently than the Fed Funds rate, which covers the rate at which banks lend to each other.
When it does shift, academics such as Robert Johnson of the CFA Institute point out, it has a strong effect on stocks, because it is seen as an unambiguous indicator of future monetary policy. Stocks like rate cuts.
But the Fed was not aiming to bail out stocks. Rather it was prompted to act by extreme conditions in the money market.
Companies faced acute difficulties raising finance with asset-backed commercial paper, a key way to raise short-term funds. Loss of confidence in collateral, in the wake of the subprime debacle, prompted investors to fly to quality. On Thursday, the three-month Treasury bill yield fell more than 50 basis points, as investors piled in to the world’s safest and most liquid securities.
This was such an extreme event that the market bet that the Fed would be forced to react. Hence the rally.
But the three-month Treasury-bill yield fell on Friday, showing a continued flight to quality. On Monday morning, the T-bill yield fell more than 120bp, to 2.53 per cent. Usually it stays close to the Fed Funds rate, which stayed at 5.25 per cent.
This is the sharpest move in T-bills in decades, dwarfing anything from the tech bubble, or even the Black Monday crash of October 1987. Then, investors fled stocks and piled into T-bills.
This time, shares are rising. Despite the Fed’s move, the loss of confidence in asset-backed loans and bonds appears greater than the loss of confidence in stocks in October 1987.
By John Authers, Investment Editor
Copyright The Financial Times Limited 2007
Published: August 20 2007 19:43 | Last updated: August 20 2007 19:43
The stock market has got the US Federal Reserve’s message. The money market has not. Unfortunately, the message was intended for the money market.
Stocks “bounced” after the Fed’s Friday decision to cut its discount rate, making it easier for banks to borrow. This was not surprising. Historically, the discount rate – governing the rate at which the Fed lends to banks – has moved less frequently than the Fed Funds rate, which covers the rate at which banks lend to each other.
When it does shift, academics such as Robert Johnson of the CFA Institute point out, it has a strong effect on stocks, because it is seen as an unambiguous indicator of future monetary policy. Stocks like rate cuts.
But the Fed was not aiming to bail out stocks. Rather it was prompted to act by extreme conditions in the money market.
Companies faced acute difficulties raising finance with asset-backed commercial paper, a key way to raise short-term funds. Loss of confidence in collateral, in the wake of the subprime debacle, prompted investors to fly to quality. On Thursday, the three-month Treasury bill yield fell more than 50 basis points, as investors piled in to the world’s safest and most liquid securities.
This was such an extreme event that the market bet that the Fed would be forced to react. Hence the rally.
But the three-month Treasury-bill yield fell on Friday, showing a continued flight to quality. On Monday morning, the T-bill yield fell more than 120bp, to 2.53 per cent. Usually it stays close to the Fed Funds rate, which stayed at 5.25 per cent.
This is the sharpest move in T-bills in decades, dwarfing anything from the tech bubble, or even the Black Monday crash of October 1987. Then, investors fled stocks and piled into T-bills.
This time, shares are rising. Despite the Fed’s move, the loss of confidence in asset-backed loans and bonds appears greater than the loss of confidence in stocks in October 1987.
posted by Carlos T Mock at 9:17 AM
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