The Zero Yield Economy

Wednesday, December 10, 2008 | 07:31 AM

We mentioned this yesterday as it happened, but Treasuries traded down to previously unseen yields. The 3 month T-bill went negative yield for the first time ever.

At auction, Treasury sold $27 billion of three-month bills at a discount rate of 0.005%. This is the lowest yield since it starting auctioning the securities in 1929.

Just as astounding, the U.S. sold $30 billion of four-week T-bills, at zero percent for the first time ever (4 week treasuries have been around only since 2001).


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100-Year Bonds ?

Wednesday, December 03, 2008 | 09:45 AM

Today’s WTF article is this clever funding idea, via former Treasury undersecretary (now at BlackRock) Peter Fisher: Issue 100-year bonds.


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Has the Market Fully Discounted the Bush Presidency ?

Tuesday, November 04, 2008 | 11:30 AM

What is it that the market is pricing in?

While partisans try to blame the crash on one or the other candidates, here's something I have yet to hear any of the TV pundits discuss: The George W. Bush presidency.

While partisans try to blame the crash on one or the other candidates, here's something I have yet to hear any of the TV pundits discuss: Blaming it on the presidency of George W. Bush.


Currency Markets are the world's vote on US monetary policies



S&P500 2001-08, weekly

Equities: Which Sell off do you hold the occupant of the White House Responsible for: The One that began prior to his arrival, or the one that began prior to his departure?

Chart courtesy of Fusion IQ, Bloomberg

I do not believe that the 2000-03 crash was a result the markets pricing in a Bush Presidency. However, one could certainly make the case that the past few years market action has been the result of his fiscal, tax, and spending policies.


Oil Prices Respond to Energy and Military Policies

Two oil men in the White House, two wars, no conservation efforts, and no attempts to develop alternatives to Crude Oil:



Gold, 2001-08 weekly

The Gold market is a store of value in uncertain times -- what is it saying about the Bush policies?

Chart courtesy of Fusion IQ, Bloomberg


Bonds: 10 Year Treasury, 1980-2008

Chart courtesy of Fusion IQ, Bloomberg


Longstanding downward trend in rates was in effect since the Volcker Fed broke inflation in 1980 -- recent Presidents (W, Clinton, Reagan) have all benefited from this trend

What are the markets really pricing in ? Might it be the W. presidency?



Permalink and comments here

Pricing in a Bush Presidency (July 08, 2008)

Tuesday, November 04, 2008 | 11:30 AM | Permalink | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post

Ted Spread Improves

Thursday, October 30, 2008 | 12:00 PM

Nice chart via my fishing buddy, John Silvia, who notes:

In its statement, the Federal Open Market Committee suggested that recent policy actions should help over time to improve credit conditions. Financial markets have evidenced some very modest improvement in credit spreads, but the search for that new equilibrium between risk and reward remains in progress. For example, both the price and the availability of credit to the high grade and high yield bond markets have assumed a very different tone from earlier in this decade. Meanwhile, the TED spread widened to over 400 basis points and has now retreated below 300 basis points (Figure 3). Commercial paper issuance has increased especially for commercial paper maturities over 81 days. The market and the economy remain constrained by the paradox of lemons—make more lemonade. This process will take time and supports continued Fed easing at the short end of the curve and credit aversion in the private market.

TED Spread

Source: Federal Reserve Board and Wachovia

The Big Picture is moving! The new post here

Thursday, October 30, 2008 | 12:00 PM | Permalink | Comments (9) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post

Here Comes Da Zirp!

Thursday, October 30, 2008 | 07:05 AM

How likely are we to see a zero percent interest policy? Pretty likely:

"Federal Reserve Chairman Ben S. Bernanke signaled he's ready to cut interest rates to the lowest level on record should the central bank's actions fail to stem the deepening economic slump.

Policy makers said yesterday that ``downside risks to growth remain'' even after their half-point reduction in the main rate to 1 percent. The Fed dropped a reference in its statement to threats from inflation, projecting "levels consistent with price stability'' in coming quarters...

Bernanke is drawing on an academic career studying the failed efforts to prevent the Great Depression, and yesterday's shift indicates he's prepared to revisit his 2003 commitment as a governor to lower rates to zero percent if necessary. Should lending fail to revive by December, the central bank will probably cut by another half point, said former Fed Governor Lyle Gramley...

Reflecting a crisis that has reverberated throughout the global economy, the Fed's Open Market Committee yesterday said that international rate cuts should contribute by loosening credit markets. The FOMC also said slowing economies abroad will threaten the record boom in American exports, which have kept the U.S. from a deeper slump...

In a new step to increase the availability of dollars in emerging markets, the Fed yesterday agreed to provide $120 billion to four counterparts. Brazil, Mexico, South Korea and Singapore get $30 billion each by signing the so-called currency swap lines. The U.S. already has unlimited agreements with the European Central Bank and Bank of England."

Inflation from 2002-07, Deflation from 2008-09, hyper inflation from 2010-???

I could see Gold going to $3,000, by way of $300 first.


* With apologies to Flip Wilson

Fed Signals Door 'Open' for Cutting Rates to Lowest on Record
Scott Lanman and Craig Torres
Bloomberg, Oct. 30 2008

The Big Picture is moving! The new post here

Thursday, October 30, 2008 | 07:05 AM | Permalink | Comments (41) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post

Is Money Too Expensive?

Wednesday, October 29, 2008 | 02:11 PM

Certainly not.

At 1.5%, rates are historically low.

And the problem isn't the cost of credit, its the availability of credit.

From a macro perspective, there is no reason to cut more than 25bps...leave a little dry powder for next month. (Good discussion yesterday at Real Time Economics)

Rate decision in 5 minutes.


UPDATE:  October 29, 2008 2:18pm


Federal Reserve cuts interest rates to 1% -- the lowest levels since 2003.

Continue reading "Is Money Too Expensive? "

Wednesday, October 29, 2008 | 02:11 PM | Permalink | Comments (96) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post

Iceland Central Bank: 18% Rate!

Tuesday, October 28, 2008 | 06:33 AM

Gee, do you think they are trying to attract some capital?

Iceland's central bank unexpectedly raised the benchmark interest rate to 18 percent, the highest in at least seven years, after the island reached an aid agreement with the International Monetary Fund.

Policy makers raised the key rate by 6 percentage points, the Reykjavik-based bank said in a statement on its Web site today, taking the rate to the highest since the bank began targeting inflation in 2001. It will publish the reasons for today's move at 11 a.m. local time.

The central bank is raising rates as Iceland, the first western nation to seek aid from the IMF since the U.K. in 1976, faces a prolonged contraction, coupled with possible hyperinflation and rising joblessness. The economy will shrink as much as 10 percent next year, the IMF forecasts. Iceland will receive about $2.1 billion in aid from the Washington-based fund, according to a deal struck on Oct. 24.

The US Fed starts a two day meeting today . . .


Iceland Central Bank Raises Key Interest Rate to 18%
Tasneem Brogger and Helga Kristen Einarsdottir
Bloomberg, Oct. 28 2008

Tuesday, October 28, 2008 | 06:33 AM | Permalink | Comments (12) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post

How Lending Standard Changes Led to the Housing Boom/Bust

Tuesday, October 21, 2008 | 07:21 AM

There is a general lack of understanding as to how the Housing boom and bust occurred, and why it led to the subsequent credit freeze. The situation is complex, and that is why we are still explaining this 3 years into the housing bust.

Let me take another shot at clarifying this:

Underlying EVERYTHING -- housing boom and bust, derivative explosion, credit crisis -- is the enormous change in lending standards. I am not sure many people understand the massive change that took place during the 2002-07 period. It was more than a subtle shift -- it was an abdication of the traditional lending standards that had existed for decades, if not centuries.

After the Greenspan Fed took rates down to ultra-low levels, home prices began to levitate. More and more mortgages were being securitized -- purchased by Wall Street, and repackaged into other forms of bond-like paper. The low rates spurred demand for this higher yielding, triple AAA rated, asset-backed paper.

In this ultra-low rate environment, where prices were appreciating, and most mortgages were being securitized, all that mattered to the mortgage originator was that a BORROWER NOT DEFAULT FOR 90 DAYS (some contracts were 6 Months). The contracts between the firms that originated mortgages and the Wall Street firms that  securitized them had explicit warranties. The mortgage seller guaranteed to the mortgage bundle buyer (underwriter) that payments were current, the mortgage holders were valid, and that the loan would not default for 90 or 180 days.

So long as the mortgage did not default in that period of time, it could not be "put back" to the originator. A salesman or mortgage business would only lose their fee if the borrower defaulted within that 3 or 6 month contractually specified period. Indeed, a default gave the buyer the right to return the mortgage and charge back the lender the full purchase price.

What do rational, profit-maximizers do? They put people in houses that would not default in 90 days -- and the easiest way to do that were the 2/28 ARM mortgages. Cheap teaser rates for 24 months, then the big reset. Once the reset occurred 24 months later, it was long off the books of the mortgage originators -- by then, it was Wall Street's problem.

This was a monumental change in lending standards. It created millions of new potential home buyers.  Why? Instead of making sure that borrowers could pay back a loan, and not default over the course of a 30 YEAR FIXED MORTGAGE, originators only had to find people who could afford the teaser rate for a few months.

This was a simply unprecedented shift in lending standards.

And, it is why 293 mortgage lenders have imploded -- all of these bad loans were put back to them. Note that the fear of this occurring is what was supposed to keep the lenders in line. The repercussions of this is why Greenspan believed the free market could self-regulate. (After all, people are rational, right?) One of the many odd lessons of this era is that, under certain circumstances, companies and salespeople will pursue short term profits to the point where it literally destroys the firm.

If you want to point to the single most important element of the Housing boom and bust, this is it. Ultimately, these defaulting mortgages underlie the entire credit freeze. And, it would not have been possible without the Greenspan ultra-low rates, which made the teaser portion (the "2" of the 2/28) of these mortgages so attractive. 

Contrary to the cliche, failure is not an orphan in the current crisis -- it has 100s of fathers. But these four are the primary movers, the key to everything else. The perfect storm of ultra-low rates, securitization, lax lending standards and triple AAA ratings -- these are the key to how we ended up with the previous boom, followed by a bust, and ultimately, the credit freeze.




Tuesday, October 21, 2008 | 07:21 AM | Permalink | Comments (68) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post

What's PIMCO Charging?

Wednesday, October 15, 2008 | 08:45 AM

Is Pimco Doing This For Free?

"One of the many concerns expressed on Capitol Hill this week about the Treasury Department’s $700 billion rescue plan was how to keep the Wall Street firms that helped to create the crisis from making a killing if they are hired to help contain it.

William H. Gross, the manager of the country’s largest bond mutual fund, has a solution for that: He is offering to do it free.

“We have a large and brilliant staff that can analyze and has analyzed subprime mortgages that can help the Treasury out,” Mr. Gross, the co-chief investment officer for Pacific Investment Management Company, said Tuesday in an interview at the company’s headquarters here. “And I’d even be willing to say that if the Treasury wanted to use our help, it would come, you know, free and clear as long as every other firm would do the same.”

I am curious as to if this is gratis.  When Bill Gross offered to do this for free, was he only discussing the TARP, or did it apply to all aspects of the bailout plan?

Inquiring minds want to know . . .


Gross to Manage TARP for Free ?   (September 25, 2008)

Pimco Tapped to Manage Fed's CPFF 
WSJ, October 15, 2008

Wednesday, October 15, 2008 | 08:45 AM | Permalink | Comments (17) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post

Emergency Global Rate Cuts: 50 bps

Wednesday, October 08, 2008 | 07:09 AM

Global_rate_cuts Coordinated rate cuts around the world, 50 basis from the Federal Reserve, European Central Bank and four other central banks.

The banks lowered interest rates in an unprecedented, emergency coordinated bid to "ease the economic effects of the financial crisis."

The Fed cut its benchmark rate by a half point to 1.5%, as the ECB and central banks of the U.K., Canada, Sweden and Switzerland are also reducing rates.

Here is the Fed statement:

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

Federal Reserve Actions
The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent.  In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston.

Joint Statement by Central Banks   
Federal Reserve, October 8, 2008  7:00 a.m. EDT

Wednesday, October 08, 2008 | 07:09 AM | Permalink | Comments (105) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post

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