Friday, November 21, 2008

The steepening curve, redux

(FT Alphaville) Quite a few commentators have been knocked off their chairs the past couple of days by the seeming ability of the S&P, DJIA, FTSE et al to just keep falling, dammit.

What’s happening in the stock markets doesn’t even come close to the chaos in credit though. US corporate bond markets are not just crashing, they’re failing. Just take a look at the two graphs below, from Bank of America’s credit team. On the left, spreads in the secondary market. On the right, issuance.

US Corporate bond yields and issuance
Spreads on the CDS indices, meanwhile, are shooting the moon.

We are, though, in a changed reality. The below is a graph of US Treasury yield curves. The two single most important things to know about yesterday’s markets?

That the yield on 3-month T-bills is currently 2bps.

And that the yield on 30-year Treasuries closed at 345bps. Down 45bps on the day.

Yield curves

Which means the yield cure is actually, flattening a little. Compare yesterday’s curve to one last week. This is all in line with Dresdner’s predictions yesterday: of a bull-flattened curve instead of the classic, bull-steepened curve.

What the curves are showing then is that the rules about markets and risk are changing: we are moving towards a zero interest rate environment. The nature of credit is altering.

Consider: those 3 month T-bills yielding so close to 0 has serious implications for the Fed’s liquidity ops: how much difference, afterall, now, is there between a T-bill and cash? Not much. Indeed, in a sense, cash is a more competative store of value now because it is the ultimate liquid asset.

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