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Daily Market Commentary

We just saw more of the bailout this morning, as the Fed dropped their discount rate by 50 bps.  This is the rate the Fed lends on overnight repos at the bank window.  Really this is a gesture towards the market saying that the Fed is ready and willing to help out the market should this volatility and illiquidity get any worse.  This started when the Fed began to allow more than just treasury and agency paper as collateral at the window last week, and perhaps will finish with an outright cut to the Fed Funds rate, which still stands at 5.25%.  We are hoping that the Fed


  The Fed Funds rate, the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.  The discount rate is the rate at which financial institutions can borrow with high quality collateral.  Only depository institutions can borrow at this level, but the intended effect is to provide more liquidity and have this lower rate trickle down through the financial system.


  The yield curve is steepening significantly on this move.  In the past, as we saw the entire yield curve trade very flat and significantly below the overnight rate, we wondered if the curve would normalize through a rise in long rates or a drop in short rates.  Though the curve has steepened significantly this month through the later, this is the official indication (aside from T-Bills trading around 4%) that short rates are headed lower.  See chart of steepener in the Daily FI Snapshot.



  The CAD$ has shot higher by a cent and a half on the news of lower deposit rates in the US, and all world currencies are following suit.  The CAD$ is far and away the strongest major in the world right now though, trading higher against EUR, GBP,

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