PrefBlog

Another reasonably normal day, bearing in mind that we’re talking about financial markets here and the word “normal” needs to be taken with a grain of salt.

Of great interest to me (I dare not say, “Of prime interest”, for fear of being misunderstood) was the Bank of Canada’s cash management bill, $2.5-billion of one-month bills to be auctioned tomorrow morning. They had to do something! The spread between 1-month bills and one-month CP as of the 24th had widened to 137bp (out 40bp just on the week) which I find just incredible … I mentioned on the 21st that I thought a 60bp three-month Bill/BA spread was amazing.”Cash Management Bill” is simply what they’re calling it – I’m not even sure if they can call it anything else, given that it’s not part of the regular auction routine.

I suspect that all the actual cash will be pushed right back into the money supply as loans against ABCP (maybe indirectly, e.g., National finances all the ABCP it suddenly owns by repo-ing more of its Canada holdings) … but I’m sure only a few people know that for sure at this point.

Bank of Canada deputy governor Pierre Duguay stated:

“Specifically, we are asking ourselves two questions: First, how much greater is the risk to the Canadian economy now posed by developments in the U.S. economy? And second, to what extent would the re-pricing of credit risk lead to a sustained tightening of credit conditions in Canada?”

In other words, they may have to ease considerably just to keep the commercial paper market (and the rest of the corporate curve) where they want it to be. We’ll see! The money-market quality spread has, maybe, stabilized in the US.

Speaking of the US, Brad Setser continues his probing of the current account deficit, Menzie Chinn highlights risks to the US deficit projections and Stephen Cecchetti reviews the Fed reaction to the crisis. He also includes the sentence

The sub-prime crisis made it clear that the rating agencies were doing a poor job of evaluating risks in securities that were backed by sub-prime mortgages.

but does not substantiate the charge that they’re doing a poor job. But that’s another post … and doubtless many more, as actual data start to come in to replace all this guessing.

I hope nobody thinks I’m totally indifferent to the situation, or that I’m carrying a torch for the ratings agencies. It’s just that … I’m not the oldest guy in the business, not by a long shot, but I’ve been around the block. If I had a nickel for every time I’ve been told the world’s about to end (and a dime for each time it was the result of a conspiracy or massive negligence by big institutions) … I’d be too busy with my troupe of dancing girls to bother writing this blog.

A lot of hedgies are going to get wiped out and the sooner the better; a few pension funds are going to play blame the manager; credit squeezes and the sudden conversion of Money Market instruments to term debt a la Coventree may give a recessionary cast to the economy; the US may well enter a recession, since a lot of their deficit-fuelled growth in the past few years has been housing-related and there ain’t gonna be much more of that; a few real companies will probably get weak enough that they get taken over at prices that don’t make long-term shareholders very happy (like just happened to Sachsen, mentioned here on August 20); and we might even see a spectacular flame-out if a big institution’s risk-controls are found wanting  … but I’m not so sure that the solidly investment-grade tranches of sub-prime debt are as bad as they’re made out to be.

What I am sure of, is that if I was a hedgie myself, I’d be bidding … low. And telling the newspapers how awful everything is.

US Equities fell a bit, as did those in Canada. There is concern that the de facto easing will be bad for Treasuries; the Fed Fund Futures are pricing in an immediate ease to 5.00% (the current de facto rate) and another ease to the 4.75% area – and beyond – by November. Canadas had a good day, with a basically parallel shift.

Another quiet, directionless day in pref land. Split shares are getting hit this month … people appear to want direct investments in companies with recognizable names!

There were seven other $25-equivalent index-included issues trading over 10,000 shares today.

This entry was posted on Monday, August 27th, 2007 at 9:59 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.