Friday, December 7, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", December 5

- Fed's Treasuries holdings: $790.5bn (-$3.3bn)
- Other central banks' Treasuries holdings: $1,225.7bn (+$0.4bn) (*)
- Other central banks' agency securities: $811.0 (+$4.8bn) (*)
- Global Dollar Liquidity Measure: $2,827.3bn (+$2.0bn)

(*) Off-balance-sheet items

[1] Weekly Fed balance sheet watch: an early December surprise. I haven't missed a single weekly Fed balance sheet for the last ... eleven years! In other words: I only need a brief glance at the numbers to get a sense of what's coming. Then, I duly put the data into an Excel sheet for an extensive massage session. As soon I saw the latest numbers, I knew that the annual rate of change of the Global Dollar Liquidity measure would take a hit — a big one. At 12.7%, it is the lowest since March. Moreover, the stock of Treasury securities held by the Federal Reserve —a proxy for the monetary base— has all but collapsed. Its annual rate of growth (+1.9%) is the lowest since ... January 2001! The good news is that another rate cut is now firmly in the cards. And there may be some trades here: long dollar against the majors, and short commodities ...

[2] Credit Default Swaps & liquidity conditions [Liquidity @ Financial Times]. The collapse in market liquidity has taken its toll on Credit Default Swaps, widely seen as "one of the most liquid corners of the derivatives markets". While the market for single-name CDS is "almost totally illiquid in Europe", even benchmark CDS indices are seeing lower volumes. As I read this FT piece, I note that, over the last two sessions, CDS spreads have narrowed considerably more than spreads on cash bonds. Along with the anemic VIX, this has helped the Endogenous Liquidity Index, which is now down "only" 29.7%. [Sarah O'Connor: "Credit default swaps in treacherous waters", Financial Times]

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