To: John Pitera who wrote (5877 ) 3/20/2002 11:38:32 PM From: John Pitera Respond to The Swedish Central Bank raising interest rates on Tuesday, it was the first central bank in the industrialized world to begin the monetary tightening cycle.The Riksbank's decision to raise rates 0.25 percentage point to 4.00% was no surprise, and the prospect of more rate increases should underpin the krona as dealers take advantage of short-term rate differentials, analysts said. confusion surrounding the underperformance of longer-term rates . For our part, we would note that there is a strong correlation between money supply growth and yield spreads , suggesting that despite all of the headline evidence, the market may actually be somewhat concerned about the potential for inflation . This dynamic suggests that further curve flattening will likely be bearish in nature, fueled by a sharper rise in short-term yields. However, we have not completely given up for a bullish flattener, as it is important to remember that while liquidity remains rampant, it still seems to be having trouble finding a productive home . Not surprisingly, this brings us back to the fact that first quarter corporate defaults are now on target to hit a record $30 bln. In addition, there have been 135 downgrades of US companies year to date, while upgrades have lagged markedly at just 35. According Moody's, this 4.7 to 1 ratio is the highest since the fourth quarter of 1990. Not to be outdone, there have been 57 investment-grade downgrades this year, compared with just 8 upgrades. Of interest, this 7.1 to 1 ratio is the steepest on record. Burn paper, burn!shifted to a symmetrical directive for the first time since the reformulation of the policy statement in early 2000 . The accompanying statement noted that "the economy, bolstered by a marked swing in inventory investment, is expanding at a significant pace. Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain". While the market continues to look for the Fed to embark on a tightening cycle, the benign inflationary backdrop does offer some reprieve for the Fed to better stress-test the quality of any recovery.
