March 19, 2008
Fed Chairman Bernanke confounded all the pundits with his puny 75 basis points reduction in the Fed Funds Rate. While the release pointed to further risks to economic growth, it also contained worrisome mentions of inflation risks.
It may be that Bernanke wanted to send a message to market participants that he was not going to do their bidding every time and perhaps he did not see the urgency for a deeper cut.
Meanwhile the flight to quality carries on unabated, despite yesterday's confidence building releases from Lehman and Goldman, plus Morgan Stanley this morning.
The TED spread has blown out to 185 mostly as a result of 3 month US Treasury bills falling to 0.83%. That is correct; it is a zero handle!
The Bank of Canada meets next on April 22 and there is every reason to expect Governor Carney to match this reduction as our economy is being dragged down by our neighbour.
To all those who are puffing their chests about our currency being over parity, you should be aware that the Loonie is the second weakest of the significant currencies as the US dollar remains in freefall.
This morning we will see the pricing for an $ 11billion CMB issue in two tranches, $ 2b 23 years and $9b 5 year. Indicative of credit spread worries, these issues will come at significant yield spreads over Canadas, despite being 100% guaranteed by Canada. Watch for pricing details later this morning.
Back to the Fed. The most significant developments of the past week were the opening of the Discount window to the primary dealers plus the move to accept a broader range of collateral such as mortgage backed securities. The Fed could resort to outright purchase of securities if it deems that to be necessary.
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