Pimco Investments fund manager Steve Rodosky declared today that the US Federal Reserve’s $300 billion Treasury purchase program may be affecting positive changes in the credit markets. The yield on the 10 year note has been held below 3% over the past several weeks, in turn keeping mortgage rates at record lows as the US housing market continues to dwindle.
US 3 and 10 Year Treasury Yields
Current mortgage rates in the US are as low as 180 basis points above the 10 year Treasury Note:
mortgage yields april 22 2009
The spread or difference between the yield on Government and private issuances has declined since the details behind the Fed’s bond buying program were released in mid-March. Other improving credit metrics include:
$3 billion 10-yr note sale by JP Morgan this April. This issuance is not backed by the FDIC.
Junk bond issuances are at a record high (since June of 2008), with over $4 billion worth of bonds hitting the market this past week.
Although positive signs abound, the market will likely continue to show signs of uncertainty until the “stress test” results are out for the US’s 19 largest banks. Results are due on or around May 4th – should banks appear fragile, there will likely be a flight to quality (Treasury Bonds) and the spread between public and private debt will widen. Other unesolved issues for US banks include recapitalization and a slew of regulatory hurdles which will likely be implemented in the coming months.
Despite the good news, unemployment is still at a 25 year high at 8.5% and bond market investors are still favoring government issuances. The Fed’s bond buying program will end on September so it’ll be interesting to see how uniformly their purchases will be as the time draws nearer to the program’s end. Inspected with less formality, the Government is printing money to lend itself more money…shall we predict the CPI 2-3 yrs down the line?
Few will argue that it makes little sense to pay over 70 executives…wait, no – that’s too easy: pay over 70 people responsible for AIG’s well being, 1+ million dollar bonuses when they hit the wall at about 170mph, several drinks under with no clothing on (a fair analogy?). I’ll refrain from repetitious babble about what constitutes fairness and a lack thereof.
The reality is I’m afraid, that life isn’t fair, subject to some range of definitions. The most will accrue to the few and the rest will have to cope. Some will never have a chance — about 26,000 people will die today from preventable causes. Whether or not you’re the one cleaning rentals at Hertz making $30k or a derivatives trader at AIG raking in >$1M, at least you’re alive. Chances are, the only one causing or preventing you from doing either is yourself.
If you find yourself angry at some conditions which you yourself have no control over, then you should pay attention to those you can influence…address what can be addressed and pay little mind to situations which lie outside your sphere of influence. No amount of howling over spilled milk will make the milkman return…only the new day will bring a second chance.
After US banks have received several hundred billion dollars of taxpayer money they still aren’t lending at an acceptable rate, according to President Obama.
The solution, further nationalization of the financial industry via the Treasury’s purchase of SBA backed debt. So at the end of the day, the Federal government is convincing commercial banks to facilitate credit expansion by purchasing the securities shortly after they’re created. Sounds like the MBS market (Bear Sterns?).
These actions are commencing under the Emergency Economic Stabilization Act – whereby the US Treasury has the power to purchase this class of loans (partially guaranteed by the SBS) through the 31st of December.
According to the Department of the Treasury:
“By making this pledge, Treasury provides assurances to community banks and other lenders that they can sell the new 7(a) loans they make, providing them with cash they can use to extend even more credit.”
Hmmm…I wonder why nobody is willing to purchase small business loans? Could it be horrible macroeconomic fundamentals? Is this merely an expectations game where everyone is waiting on each other to make a move…or are we really in worse shape than we know? Considering that small business is the engine of economic growth and activity in the Unites States (and the loans are already partially guaranteed by the SBA), this is a terrible acknowledgement and a desperate act, at best.
A related analysis - approximately $300,000,000,000 of non financial corporate debt will be maturing over the next 3 years. The likely scenario will involve refunding at higher rates, as credit ratings continue to slide across the spectrum of investment grade corporate debt. Looks like corporate America may be forced to tighten its belt a bit more…cutting back , it’s not just for the small business!
