PrefBlog

There were massive rate cuts in Europe:

The Bank of England led European central banks in reducing borrowing costs to counter the worst financial crisis in almost a century, cutting its key rate by 1.5 percentage points to the lowest level since 1955.

The U.K. central bank reduced its key rate by the most since 1992, taking it to 3 percent. The European Central Bank lowered its benchmark by 50 basis points to 3.25 percent and Swiss policy makers cut their main lending rate by the same margin to 2 percent after an unscheduled meeting.

The BoE press release is unusually sombre:

Since mid-September, the global banking system has experienced its most serious disruption for almost a century. While the measures taken on bank capital, funding and liquidity in several countries, including our own, have begun to ease the situation, the availability of credit to households and businesses is likely to remain restricted for some time. As a consequence, money and credit conditions have tightened sharply. Equity prices have fallen substantially in many countries.

In the United Kingdom, output fell sharply in the third quarter. Business surveys and reports by the Bank’s regional Agents point to continued severe contraction in the near term. Consumer spending has faltered in the face of a squeeze on household budgets and tighter credit. Residential investment has fallen sharply and the prospects for business investment have weakened. Economic conditions have also deteriorated in the UK’s main export markets.

With the expansion of the Fed’s balance sheet comes an extraordinary level of Treasury issuance:

Over the October – December 2008 quarter, the Treasury expects to borrow $550 billion of marketable debt, assuming an end-of-December cash balance of $300 billion, which includes $260 billion for the Supplementary Financing Program (SFP). Without the SFP, the end-of-December cash balance is expected to be $40 billion. This borrowing estimate is $408 billion higher than announced in July 2008. The increase in borrowing is primarily due to higher outlays related to economic assistance programs, lower receipts, and lower net issuances of State and Local Government Series securities.

Over the January – March 2009 quarter, the Treasury expects to borrow $368 billion of marketable debt, assuming an end-of-March cash balance of $75 billion.

This issuance is causing dislocation in the Treasury yield curve:

One trader pointed out some amazing anomalies on the 3 year /4 year portion of the curve. For instance, one can sell the 3 3/8s of November 2012 and buy the new 3 year (November 2011) at even yield. The curve is quite steep so unless one expects dramatic flattening soon that trader is a winner,

Similarly, an investor can sell the 4 1/4s September 2012 and buy a combination of three year notes and 5 year notes and pick up 88 basis points of gross yield. That just does not make sense and anyone owning those bonds should sell them in favor of most anything else.

There are rumours GMAC will become a bank:

Cerberus is weighing a plan to distribute its GMAC stake to investors in its private-equity funds, according to the people, who declined to be identified because the deliberations aren’t public. The tactic, one of several options under discussion, may enable Detroit-based GMAC to become a bank and get funding from the U.S. Treasury and Federal Reserve without subjecting Cerberus to banking regulations.

In a bit of good news Wells Farge raised significant equity:

Wells Fargo & Co., the biggest bank on the U.S. West Coast, raised $11 billion in a stock sale to help fund its purchase of Wachovia Corp., exceeding its estimate for the offering.

The bank sold 407.5 million shares for $27 each, 6.2 percent below today’s closing price of $28.77, according to a company statement. The company may sell an additional 61 million shares if demand warrants. The San Francisco-based lender had planned to raise $10 billion.

The U.S. Treasury bought $25 billion of Wells Fargo’s preferred shares in October as part of its rescue of the banking industry. Wells Fargo is expanding its deposit base to the East Coast and creating the biggest U.S. bank by branches with its purchase of Charlotte, North Carolina-based Wachovia.

Wells Fargo joins other banks in raising capital, including JPMorgan Chase & Co’s $11.5 billion offering in September and $10 billion pulled in by Bank of America Corp. in October.

A day enlivened by news of the new GWO Fixed-Reset 6.00%+307 issue; PerpetualDiscounts gave up some of the gains they made in the first part of the week. Volume remained vigorous.

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

This entry was posted on Thursday, November 6th, 2008 at 10:22 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.