Friday, March 7, 2008

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

- Fed's Treasuries holdings: $789.6bn (+$12.9bn)
- Other central banks' Treasuries holdings: $1,280.6bn (+$10.3bn) (*)
- Other central banks' agency securities: $869.4 (-$1.8bn) (*)
- Global Dollar Liquidity Measure: $2,939.6bn (+$21.5bn)

(*) Off-balance-sheet items

Who cares about funding (or macroeconomic) liquidity when market liquidity is all but collapsing? The answer: FX and commodity markets traders. They like what they see: foreign central banks desperately trying to avoid the unavoidable — namely, sharp interest rate increases in places like China, Russia and Argentina, to name but a few. We may be witnessing the last phase of extravagant moves in some of these markets. Meanwhile, our Endogenous Liquidity Index saw one of its worst days ever, as all components —including all CDS indices— fell sharply (a very rare occurrence).The ELI is now down more than 50% from a year ago! The hedge fund community, in particular, is feeling the heat. Peloton Partners, trying to pick the bottom in credit markets, is now out of the game. Carlyle Capital, which had geared up 32 times to buy a $22bn book a triple-A mortgages, is making headlines (for the wrong reasons, presumably).

To put it in perspective, here are a few quotes from analysts interviewed by the Financial Times: "The repricing of liquidity and credit lines to hedge funds will squeeze more credit funds out of business" (Huw van Steenis, Morgan Stanley); "... The most chaotic times in the credit markets since the Great Depression" (William O'Donnell, UBS); "There is an extreme lack of liquidity and markets are being moved by liquidation fears and margin calls" (Tom Di Galoma, Jefferies). There you have it. [Michael Mackenzie: "Hedge funds spark fixed income stress", Financial Times] [James Mackintosh: "Gloom set to worsen as threat of spiral grows", Financial Times].

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