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Daily Market Commentary

It seems as if the Fed is intent on staying the course for the time being.  Intra-meeting emergency rate cuts can cause as much panic as they can do good, and we applaud their actions so far.  Assuring the market that they are there and willing to lend support by allowing a broader range of securities at the repo window and lowering the rate at which banks can borrow there are two important steps in instilling confidence in the market.  Make no mistake... there is no emergency in the marketplace (yet).  We stand behind the Bank of England's stance (and what appears to be the Bank of Canada's stance also, although not explicitly stated) that drastic cuts now would be just rewarding the market for excessive risk taking.  As long as the central banks are monitoring and at the ready, the markets should work out their excesses on their own.  Should a true emergency errupt, then we feel the Fed will act.



The Big 5 banks in re-assured the marketplace yesterday with regards to their asset backed programs (link to press release - http://ca.news.finance.yahoo.com/s/21082007/6/finance-banks-support-own-abcp-programs.html



As we expected, they are not going to let their own programs suffer, and we expect them to make good on their asset backed programs, as the underlying credit continues to be a healthy, safe bet, although the structure of the programs obviously needs some review.  It seems as if longer term floating rate notes are a better bet than short term rolling paper.


The bond market has been steadily grinding higher throughout the week, but giving up some gains this morning.  With two year treasuries crossing through the 4% barrier and trading as high as 3.99% yesterday - a breather is due.  Some of the steepness the curve has taken on recently is giving up also, which appeared to be way overdone (as highlighted in yesterday FI snapshot).  There is no data aside from horrible mortgage application numbers this morning (no surprise there), not that the market was trading off of data recently anyways.  Home sales numbers tomorrow and Friday will, however, be important, as the current credit crisis is directly related to consumer borrowing.  Mortgage foreclosures are on the rise in the US, so the market will pay attention and be very cautious in this sector.



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