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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: Jags who wrote (1345)	3/4/1999 10:30:00 AM
From: Henry Volquardsen	Read Replies (1) of 3536

Jagadish, Actually a spread of 93 basis points between fed funds and 30 yr treasuries is not very wide at all. It only appears wide in the context of the last year. On a historic basis it is a bit narrow as the spread for most of the 90s was between 100 and 200 bps. Neither has a real impact on credit availability to corporations, consumers or banks. On the yield curve they represent the extremes where little non government funding takes place. 30 year rates are beyond the scope of most funding requirements. Even 30 year fixed mortgages have much shorter duration than the 30 yr treasury and are more sensitive to 10 yr rates. And very little corporate financing takes place beyond 15 years. And fed funds is overnight money. Banks and corporations do not fund themselves overnight. It is really more a source of marginal funding. Also both fed funds and 30 year treasuries represent the highest credit quality. Neither will give you a good feel for what the appetite for lending to banks, corporations and consumers is. To judge that you need to keep an eye on 30 and 90 day commercial paper for short term funding. For longer term funding track the 2, 5 and 10 year interbank interest rate swap rates. It is also important to look at these rates relative to the high quality benchmarks such as treasuries. As an example look at last year. Interbank swap rates were not very high at all and if you judged them on an absolute basis it would make you think that liquidity was flush. However the spread between swaps and treasuries of the same maturity was at the the widest levels for years. This signaled a significant concern on liwuidity and that lenders were indeed fleeing to quality. In contrast, currently treasury yields have been rising yet spreads have been narrowing. This indicates that money is readily available. Where would money flow if it came out of the stock market? I am very bullish on bonds for the final three quarters of the year. Past mid April or at 30 year yield of @5.80 I am a big buyer of treasury paper.

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