While indexes of derivatives that measure the risk of default show increasing investor confidence, the difference between the interest that banks and the U.S. government pay for three-month loans is wider now than a month ago. That's a sign the Fed's Sept. 18 rate decision has yet to persuade bondholders that lower borrowing costs will stop ``disruptions in financial markets'' from hurting the economy.
``The reality is the fundamentals haven't gotten any better, and, if anything, they've gotten worse,'' said Mark Kiesel, an executive vice president at Newport Beach, California-based Pimco who oversees $85 billion in corporate bonds.
About three-quarters of 30 fund managers who oversee $1.25 trillion expect a hedge fund or credit market blowup in the ``near future,'' according to a survey by Jersey City, New Jersey-based research firm Ried, Thunberg & Co. dated Oct. 1.
One of my primary arguments against the Fed easing was it wasn't going to solve the basic problem of confidence. Right now there is still concern that a borrower of even short-term funds will go bankrupt before he can repay a short-term loan. This is a prime reason why the asset-backed commercial paper market is still contracting. Here's a chart from the Federal Reserve:
In addition, the Bloomberg article makes a crucial observation: the difference between the interest that banks and the U.S. government pay for three-month loans is wider now than a month ago. That means the risk associated with short-term bank loans is increasing, not decreasing. That's a huge story because it indicates investors are still concerned about a credit blow-up.
In addition:
More than 65 percent of investors in mortgage-backed securities are struggling to find bids for their holdings, according to a survey of 251 institutions last month by Greenwich Associates, a Greenwich, Connecticut-based consulting firm. Among holders of CDOs, the figure is 80 percent.
The U.S. commercial paper market is shrinking. The amount of debt outstanding that matures in 270 days or less fell $13.6 billion the week ended Sept. 26 to a seasonally adjusted $1.86 trillion, according to the Fed. It's down 17 percent in the past seven weeks.
Mortgage paper use to be very liquid. I use to trade in it. The thought of not being able to find a bid is well, really odd.
Considering the news yesterday that Citigroup and UBS have major write-downs caused by mortgage-related paper, it seems extremely premature for the markets to be saying "all is well". In addition, consider this table from the Bank of America (courtesy of Calculated Risk) that shows the reset schedule for ARMs.
In short -- one rate cut does not mean everything is OK.
