Carry On Liquidity?

The European Central Bank’s (ECB) job is to set the target interest rate (currently 4%) and then ensure that the market rate (as dictated by banks) does not deviate too far from this. As the attached chart shows (click to enlarge), the market rate soared to 0.6% above the target rate yesterday, and the ECB yesterday responded to the credit crunch by injecting almost €95bn of liquidity in to mo…

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Global interest rate hikes coming to an end?

Global interest rates now look like they are close to normalising. Recent developments in the US housing market have persuaded me that the problem is going to continue getting worse before it gets better – affordability is close to all time lows, housing stock is around all time highs, home sales are drying up, homeowner defaults are rocketing and US financing conditions are ever tightening (se…

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Alt-A: next to wobble?

Bloomberg’s Mark Gilbert has written an interesting piece (read here) about the recent turbulence in credit markets. In particular it’s worth noting Moody’s comment that the next level of loans up in quality from sub-prime, the "Alt-A" mortgages, look to be showing the same level of distress as the supposedly weaker loans. Loose lending standards, and falling house prices are a toxic mix for US…

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Not a good week for bulls

The iTraxx Crossover Index broke above 450 basis points on Friday, even though Q2 US growth figures were above consensus and headline corporate earnings figures have been reasonably strong of late. European CCC rated bonds have returned -6% since spreads reached all time lows at the end of May.
We’ve covered many of the key issues previously, but in short, a slowing US housing market has led t…

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Letter from the Fed

Our economist, Steven Andrew and I visited the Washington Fed and New York Fed last week. Here are Steven’s quick and dirty comments on what we learned from them – written on his Blackberry at Newark airport, so he asks you to be gentle on the terse style.

Some quick thoughts from our meetings with the Fed this week:

The Fed in Washington
Largely upbeat (they’re never anything else). Not genuin…

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The Week Ahead

After last week’s doom & gloom (see here) all appears significantly more rosy at the start of this week. The iTraxx Crossover index, currently trading at 285 as I type, is tighter than the 310 highs reached during last week with other areas of the market also bouncing back. Will it last? Well, this week’s plethora of data could give a good indication and potentially set the tone through the sum…

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In defence of CDOs

CDOs (Collateralised Debt Obligations) are being hailed in some quarters as the next split cap catastrophe. As a result of the US sub prime mortgage crisis, some CDOs that are heavily exposed to the US subprime mortgage crisis have fallen dramatically in value and hedge funds that have a big exposure to these CDOs are on the brink of collapse. There are legitimate concerns with some aspects of …

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Russia and realpolitik

At the risk of finding something radioactive in my sushi, the escalating tension between Russia and the UK makes me nervous about the amount of issuance of capital (both equity and bonds) out of the former Soviet republics. Credit risk is not just about ability to repay a debt, but also about willingness to repay and it should take into the account to ability to take legal action to recover mon…
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Doom & Gloom

The last couple of days have seen a big re-pricing of risk in the sub-investment grade world. The iTraxx Crossover index of the most traded high yield companies has widened from a spread of below 200 bps in June, to 300 bps yesterday. This move was triggered by both Moody’s and S&P announcing the downgrades of hundreds of bonds backed by US sub-prime mortgages. The face value of the BBB-ABX ind…

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