Tuesday, November 11, 2008

AAA drops; TED Spread Rises

Both 5 year and 10 year AAA banking and finance rates drop at a slower speed, and settle at 6.30% and 7.77% respectively. The risk premium of each is 530pts and 677pts respectively. One month prior, immediately after Oct 10 and interest rate cut by 50pts, the risk premium of each is 475pts and 600pts respectively. With massive bailout and expectation on new policies, banks are still unwilling to do longer term commercial loans. The figures are actually worsening. More bankrupcies in USA can be expected (that will further drive down the market).

Mortgage rates drop also slowdown and settle at the range of 5.93 to 7.31%. Property market will continue to go worse and trigger another wave of panic.

1 Month LIBOR is 1.54%. 3 month LIBOR is 2.24%.

The 3-month T-bill was auctioned yesterday at a discount of 0.355%. Today at ET2:00am the T-bill was quoted at the discount of 0.42%. Despite the drop which may be a hint of capital leaving risk-free market looking for short-term return, the TED remains at 182pts, some 150pts deviated from the normal range. Further observation on the 3-month T-bill at later period, after Asian market closing and European marketing opening, may show the trend of US market tonight.

Meanwhile, UK, Japan, Germany, and Australia have their government bond prices risen. Investors on OECD are shown to become more and more risk-adverse. Brazil bond prices dropped on the other hand. Lack of confidence on emerging countries economic and underlying political stability arises. Money continuously flows out from these countries.

Hong Kong, with the rather small pool, China factors, free capital flow, and lame government becomes a haven for speculators and risk-takers. By balancing a portfolio with risk-free assets, globalized investors can on the one hand borrow JPY to invest on comparatively safer asset in OECD countries; on the other hand, can put a part of the investment to make a fortune by speculating in Hong Kong. While overall speaking Hong Kong will not be immuned from the downturn by both USA and China, high magnitude of fluctuation on a downward long-term curve can be expected.

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