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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (54724)	2/26/2006 10:01:04 AM
From: russwinter	Respond to of 110194

seriously underestimated the strength of the housing bubble and what it would take to prick it. > I sure never thought 2% or 3% Fed Fund rates would prick it, but the key aspect that has blown away all our predictions and models (including the Fed's), is that credit and risk spreads have shrunk to almost nothing, despite the fact that overnight rates probably are getting normalized. Also global liquidity growth is way down (see chart on my Feb. 14 post, Ild can you pick this one up?, xanga.com and now you will likely see three CBs: Japan, ECB and US tightening up even more over the next several weeks. So a year ago if you had told me BAA-one year CM Treasuries would be trading at a 150 bp spread, idorfman.com or that two month financial commercial paper would only yield 3 bp over three month T-bills, federalreserve.gov or that two agencies would be priced at 21 bps over 2 Treasuries, rbsgc.com right as the housing market rolled over (undeniable stream of reports here), thehousingbubbleblog.com I would have said you were nuts. I still don't understand this, but it just doesn't seem like an invisible hand at work at all. I think the extreme sloppy buying by FCBs (but which ones?) in the agency market especially (and also hard to sell Treasuries like the 10, 30 and TIPS) has badly distorted pricing (see Feb 20), xanga.com and is sending false signals. Naturally, a badly distorted credit spread arrangement, just leads to even more Ponzi finance. Credit spreads will be the key variable to watch.