Across the Curve

Some Opening Comments October 8 2008

Prices of Treasury coupon securities are surging as the turmoil in the world financial markets deepens and resists the best laid plans of policymakers to alter its course.Stock markets are plunging across the globe. The Japanese stock market suggered it’s the third largest loss ever and its steepest decline since 1987 as it crashed by 9.4 percent. The Hang Seng dropped by 8 percent and the Australian market tumbled 5 percent. European markets are down between 4 percent and 6 percent. Trading in equity futures indicates that the US markets will tumble sharply at the outset if trading were to begin now.

The UK government crafted a recapitalization program for banks but that has failed to stem the losses and restore confidence.

The ECB offered one day dollar loans and received bids for $122 billion. They filled $70 billion of the bids versus $50 billion the prior day. The rate for the funds was set at 9.5 percent which was 556 basis points higher than the prior day.

The yield on the benchmark 2 year note has slipped 7 basis points to 1.39 percent. The yield on the 5 year note has dropped 5 basis points to 2.40 percent. The yield on the benchmark 10 year note has edged 6 basis points lower to 3.44 percent and the yield on the bond has dropped 8 basis points to 3.93 percent.

The 2year/10 year spread is about one basis point wider at 205 basis points.

There is not really too much to write or say at this juncture. Confidence and trust have been shattered. Each of those is an intangible item which cannot be poked and prodded and each defies quantification and measurement.

Central bankers around the globe are working feverishly to reestablish trust and confidence but their heroic efforts bear no fruit. Each failure spawns new failure and a deeper crisis of confidence.

The system is spinning out of control and at this time it is difficult to imagine that this long running episode can resolve itself with anything other than a historic and tragic financial calamity.