Here are up-to-date charts of the TEd (3-month Treasury Bill/Eurodollar) Spread. Here is the last 30 days which gives an intraday view up to and through the Buried Stearns debacle.
This is daily chart for the last two years to give a little perspective.
Richard Russell’s constant refrain lo these many months has been “Treasury Bills and Gold.” The man is clearly a trend follower. :) This chart also explains why he has 11,000 subscribers who pay him $300 a year.
I’ve decided to update this chart only for every 5% jump in the spread (this is a kind of sick joke). What can you say about the state of the market? Store plenty of canned food, bottled fruit, candles, batteries, shotgun shells, and don’t forget the crackers.
Looks like the market is expecting a 50 bps cut. If the Fed gives less, the market will probably sell off; if they give more (very unlikely), it will probably rally.
These probabilities are calculated using Fed Funds options and futures data, last calculated 1/29/08 settlement:
These probabilities are calculated using Fed Funds futures data, last calculated 1/30/08 6:14 (Beijing time):
Related:
Federal Funds Implied Probability (12/11/07 FOMC)
Federal Funds Implied Probability (10/31/07 FOMC)
Ambac, MBIA’s Lust for CDO Returns Undermined AAA Profitability, by Christine Richard
Good article which explains how muni bond insurers like MBIA and Ambac went astray.
“The crisis has been brewing for about six years, ever since the insurers discovered collateralized debt obligations … Insurers backed $127 billion of CDOs that relied at least partly on repayments on subprime home loans … Annual premiums on CDOs averaged 50 percent of the capital that the rating companies required the insurers to set aside, according to S&P. That compared with an average risk-adjusted profit ratio of 8 percent for insuring other types of structured- finance securities. What the insurers hadn’t bargained on was that the rating companies themselves, including S&P, had grossly underestimated the risk of CDOs.
… analysts failed to see that the mortgage market was becoming riskier. They relied instead on models to predict the performance of CDOs based on historical defaults, recovery rates and correlation risks for various credit ratings. They didn’t consider how piggyback loans, which are loans used to borrow a down payment, would perform when extended to people with a history of not paying their bills.”
Related:
Fine-tuning the Model to Reach the Desired Credit Rating
AMBAC Ack! MBIA DOA?
Patient Pershing’s Philanthropic Profit Pledge
Stock Du Jour (MCO) & Random Observations (August 15, 2007 — price charts don’t lie)
I was looking over the measures of short-term liquidity, and things look like they are improving, even for asset-backed paper. But then I drew up this chart of the Commercial Mortgage-backed Securities BBB- spread and was distressed to see that there’s still no relief here. I don’t think many people anticipated that the crisis would be this severe, or perhaps, as usual, I’m hopelessly naive and out of touch.
Here’s a chart of the credit-default swap spread for the five-year government bond in Pakistan. You can see that the market has been especially nervous about Pakistan going back to around the middle of this year (spiked up massively last July). Interestingly, the spread did not widen to the levels seen following the assassination attempt on Benazir Bhutto in October. The peak for this spread was 550 back on November 23, 2007.
Rating Subprime Investment Grade Made `Joke’ of Credit Experts, by Kathleen M. Howley
“Investment banks sold $1.2 trillion of securities backed by high-interest subprime mortgages in 2005 and 2006. None of this could have happened without the participation of the three biggest arbiters of credit — Moody’s Investors Service, S&P and Fitch Ratings [ed. Oligopoly, anyone?].
About 80 percent of the securities carried AAA ratings, the same designation given to U.S. Treasury bonds … ‘Issuers got guidance from rating companies on how to shape their subprime securities to win the ratings.’
‘Our attitude used to be: We’re not here to be your friend. We’re here to look at credit quality. But that began to change.’”
Echoes of Andersen and Enron, except this is a much bigger disaster. We know what happens when auditors, and now credit rating agencies, get cozy with clients.
Bass Shorted `God I Hope You’re Wrong’ Wall Street, by Mark Pittman
“Bass and Fournier focused on single-name mortgage bond derivatives to be more certain that their bets were right. Both bought only securities rated BBB and BBB-, rather than AAA rated securities, expecting them to pay off more quickly.
Bass says he raised about $110 million and used the leveraging effect of derivatives to sell short about $1.2 billion of subprime securities. Two-thirds of it was based on BBB rated mortgage instruments. The remaining third of Bass’s investment involved securities rated one grade lower, BBB-.
An index designed to be a proxy for the lowest investment-grade subprime mortgage bonds sold in the second half of 2005, the ABX-HE-BBB- 06-01, traded as high as 102.19 cents on the dollar when it started in January 2006 and today trades at about 30 cents on the dollar.”
I think a lot of people probably saw what was coming, but they weren’t able to raise $110 million fast, like Bass. It takes money to make money, baby.
Money Market Rates Tumble; Central Banks Inject Funds
“The ECB loaned 348.6 billion euros ($501.5 billion) for two weeks at 4.21 percent today … The TED spread, or difference between what the U.S. government and banks pay for three-month loans, narrowed for a fifth day to 189 basis points, indicating an increased willingness among banks to lend. The spread was 35 basis points at the start of the year.”
I finally found the symbol for the TED spread, it’s .TEDSP [Index]
Related: SLIQ is Pretty Slick
