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Market Update

September 19, 2007

Yesterday on BNN, I said that the cut in the Discount Rate was more important the move in the Fed Funds Rate. I still believe that as the most important thing right now is to grease the machinery of the money market to get credit flowing. It is beginning to happen as Commercial Paper yields fell sharply yesterday.

In Canada, the yield spread between Treasury Bills and ankers Acceptances has narrowed from 120 basis points to 90 and should narrow further as T bills are still too expensive.The Bank of Canada has an easy task now and will likely leave rates unchanged at its next meeting. The long end of the market has taken this negatively and has sold off swiftly based on inflationary fears. The Canadian yield curve will steepen as a result of the Fed's actions as well as signs of credit flowing in the money market.

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