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Daily Market Commentary

Fed action certainly put a different spin on yesterday's markets from the recent norm.  The 30-2 year curve flattened by 20 basis points yesterday alone, as the short bonds got absolutely creamed by massive liquidity injections into the markets.  Rates rising may sound counter-intuitive when the central bankers are adding liquidity, but remember, the safe haven of treasuries have artificially low yields as so many are avoiding anything remotely resembling risk.

 

  While there are lots of headlines out this morning sceptical about the value of a $200 billion liquidity package in an impaired market that measures into the trillions, we would argue that the Fed never actually goes out and fixes the problems themselves.  They put into place the facilities for the markets to correct themselves and allow capital to flow to the areas that are in need and worthy of the investment.  We view this as a positive step and a smart move.  the traditional lowering of rates was not having the desired run-on effect that they are intended to have, as the log-jam in the economy was right at the top of the money food chain - with the big lenders.  They have little incentive to pass on lower rates when they are sitting on loads of unmarketable debt.  Allow them to temporarily trade that debt for government cash, however, and you have a more direct solution.

 

  Contrast this to China, where the PBoC is removing liquidity from the markets by lifting rates and soaking up excess funds with large debt issues and repos, having been faced with a huge 8.7% print on their inflation numbers for February.

 



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