Crisis Diary as it unfolds ….

15-Dec-08 to 21-Dec-08: Fed Acts, Markets react

The week belonged to Fed and it’s historic decision to go zero.
So how did market react to the news?

Treasuries

For quite some time all short-term treasuries were trading at zero yield due to sudden spike in risk aversion resulting in treasury bubble. If anything, this Fed decision has just salvaged the treasury bubble making sure that no one loses money when risk appetite returns everybody starts selling treasuries.

treasury-curve1

The current treasury yields are clearly record low means treasury prices are record high – 30 yr note selling as low as 2.6% yield.

TED Spreads

But real effect of Fed’s decision could be seen in TED spreads.
After long long time TED spread, the difference between rate at which banks lend each other i.e LIBOR rate and corresponding treasuries yield, dropped to 150 basis point. It is still above the normalcy level of 50 basis points, but way below all time high of 450 basis points.

TED Spread

TED Spread

Some good signs of subsiding panic and sanity returning to markets.
But we are far from any kind of recovery.

Crisis Watch:

TED spread 1.51
S&P 500 890 (+0.29%)
VIX 44.93

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December 22, 2008 - Posted by | Weekly News | , , ,

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