If this won’t awaken the all-bullish-all the time cult of optimism from its decade-long hypnosis, I don’t know what will.
U.S. Treasuries Riskier Than German Debt, Default Swaps Show
By Abigail Moses
March 11 (Bloomberg) — The risk of losses on U.S. Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves, credit-default swaps prices show.
Contracts on 10-year Treasuries traded at a record 16 basis points earlier today, compared with 15 basis points on German government notes, according to data compiled by BNP Paribas SA. In July, U.S. credit-default swaps were at 1.6 basis points, compared with 2.5 basis points on bunds.
Federal Reserve Chairman Ben S. Bernanke announced plans today to lend as much as $200 billion of Treasury notes in exchange for debt including private mortgage-backed bonds to avert an exodus from the securities that threatens to deepen the housing slump and economic slowdown.
“The U.S. government is not immune from the consequences of the credit crisis,” said Fabrizio Capanna, BNP’s head of high-grade corporate trading in London. “Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.”
The Fed is trying to ease investor concern that a decline in house valuations and record foreclosures will add to losses for companies including Freddie Mac and Fannie Mae, the two biggest providers of U.S. mortgages. The $4.5 trillion of agency mortgage securities is about the same size as the market for Treasury notes.
Credit-default swaps are used to speculate on the ability of companies or governments to repay their debt and offer a benchmark for pricing securities. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A decline indicates improvement in the perception of credit quality; an increase, the opposite.
A basis point on a credit-default swap contract protecting $10 million of debt from default for 10 years is equivalent to $1,000 a year.
Investors and securities firms have hoarded Treasuries during the credit crisis because they are considered the safest and most easily traded securities, reducing yields on two-year notes to the lowest since 2003. Yields on Treasuries have been lower than on German bunds since October.
U.S. yields rose today by the most since May 2004 to 1.77 percent from 1.5 percent on Bernanke’s plan.
The Federal Reserve has introduced another one of its smoke-and-mirrors facilities–the TLSF I think they are calling this one–with $200 billion in notional “short term lending support” to “liquidity-impaired” institutions.
A colossal misunderstanding of what liquidity means is at the root of all this. Academics who have never executed a single trade in their lives are making momentous, and poisonous, policy decisions, based upon liquidity as a theory. As a theory, liquidity “should be” constant across time, so a company that blows up because it levered too much shouldn’t blow up, because the “temporary” illiquidity doesn’t reflect the “true value” of the assets.
Liquidity, however, is a reflection of trust within and among the system. When trust falls, liquidity plunges as people stop playing the game and gather information themselves, instead of leaving it up to an obviously unreliable ratings agency or other intermediary, which they did previously.
Unfortunately, it’s not in the nature of man to admit that he’s wrong. It’s even less in the nature of a professional academic who has invested his entire life in the idea that deflation is evil. He is not going to renounce an entire life’s work, no matter what new information says.
As long as Democrats continue making favorable noises about reappointing Bernanke, the United States remains a one-way trade. Anybody who can’t see that at this point is atrociously uninformed, or in denial.
Anyway, this is Bernanke’s way of end-running around a massive rate cut. He dumps money into the system by effectively printing it and calling it a “short-term loan.”
You can see it in fixed income. Why own a Treasury if the Fed is just going to steal it from you by printing money, and then handing it out to the bankers who screwed up.
March 11 (Bloomberg) — The Federal Reserve, struggling to contain a crisis of confidence in credit markets, will for the first time lend Treasuries in exchange for debt that includes mortgage-backed securities.
The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions. Officials told reporters on condition of anonymity that the program may be increased as needed. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems.
U.S. stocks rallied the most in five years on optimism the initiative will help avert a wider credit crunch. Treasuries fell, while the premiums investors demand for debt backed by home loans guaranteed by Fannie Mae remained near a 22-year high. Fannie Mae and Freddie Mac, chartered by the government, are the largest sources of money for U.S. home loans.
“This is the most significant step the Fed has taken so far,” said David Resler, chief economist at Nomura Securities International Inc. in New York. “This relieves some of the pressure” in the credit markets, he said.
Today’s steps indicate the Fed is increasingly concerned about the investor exodus from mortgage debt, which threatens to deepen the housing contraction and the economic slowdown. Officials said the program is aimed at countering a decline in liquidity in financial markets around the world, and comes after signs of increasing stress in U.S. mortgage securities.
Policy makers held a 90-minute conference call last night, where the Federal Open Market Committee authorized the new liquidity measure along with increases in swap lines with European central banks by a vote of 9-0, Fed spokeswoman Michelle Smith said. Fed Governor Frederic Mishkin didn’t vote because he was traveling, she said.
The Fed said it will lend Treasuries for 28-day periods in return for debt including AAA-rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks. The loans will be made under a new program, the Term Securities Lending Facility, to so- called primary dealers, the 20 banks and securities firms that trade directly with the central bank.
Officials “will consult with primary dealers on technical design features” on the new resource before the first weekly auction is held on March 27, the statement said.
The Fed holds about $713 billion of Treasuries on its balance sheet.
Aid to Dealers
The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable, the officials said. They anticipated that the primary dealers, which include Goldman Sachs Group. Inc., Bear Stearns Cos. and Merrill Lynch & Co., will lend the Treasuries on to other firms in return for cash. That will help the dealers finance their balance sheets, they told reporters.
This is bullshit.
It’s a staggering increase in inflation by any other name.
It’s a bailout of Bear Stearns, which was on the ropes yesterday.
It robs holders of CD’ and everyone else who is long dollars.
It robs anyone who bought a Treasury, or anything in fixed income.
It’s the Japanification of the United States economy.
If you can’t understand that at this point, you’re on your own. It’s your responsibility to keep yourself informed. There are too many looters and not enough producers in this economic system, and if you still trust it, it’s your own fault.
As I have said on this blog many, many times, it has been investment suicide to buy Treasuries in the past several months. You get raped in global terms because the dollar will fall by more than your bonds appreciate. You will probably be raped in dollar terms too, just because the Fed has such an obvious bias in favor of real estate and equities, at the expense of bonds.
Something bad is happening, and virtually every single action taken since August by the Bernanke Fed has only aggravated the problem.