Tuesday, March 6, 2007


A look at spreads. No panic
. Federal Reserve. Selected Interest Rates.

Sharp falls in asset prices go hand in hand with higher corporate bond spreads. Looking at Moody's Aaa/Baa, we see a modest flight-to-quality move. Aaa shows a 5 bp decline with respect to December 2006, while Baa shows a 3 bp increase. Nothing dramatic. Junk bonds spreads did move a little bit: Nasdaq-Bloomberg's High Yield measure registers a 15 bp increase, a move confirmed by "New Junk". Once again: nothing to write home about.

The yield curve (10 Year Treasury-Fed funds) inverted to as much as 79 bp on monday, the highest level of inversion in the current cycle. Liquidity bears and bulls argue over how to interpret the shape of the yield curve. Bears see a deflationary credit contraction; bulls point to new sources of liquidity, thus disregarding the shape of the yield curve.

New sources of global liquidity
. Mark Kiesel. "U.S. Credit Perspectives: A New Era", PIMCO Bonds

Good article by Mark Kiesel on the so-called "new sources" of liquidity. While Kiesel warns about the risks of complacency (think about the increasingly restrictive stance of G7 C-Banks), he points to other sources of liquidity. (Kiesel uses the word "liquidity" no less than 15 times!)

These new sources include: (a) companies' cash (over 12% of GDP in the US); (b) BRICs' central banks (they help to keep US interest rates low with their purchases of US bonds); (c) petro-dollars; (d) financial innovation (CDOs and credit derivatives free up resources that swell the supply of loanable resouces in the credit markets).

As a liquidity "tell", Kiesel favours Goldman Sachs's share price [NYSE: GS].

India & the price of onions
. Navdip Dhariwal. "Indians shed tears over onions", BBC.

First it was the price of lettuce in Argentina, then tomatoes in Iran, and finally poultry in Venezuela. Now onion prices are surging in India: a clear sign of stress in the periphery of the "New Bretton Woods".

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