Wednesday, December 17, 2008

75pts Cut - Cocaine or Placebo?

FED made the historical cut last night and drove DJI, S&P500, and NASDAQ up by 4.20%, 5.14% and 5.41% respectively.

Nevertheless, anyone who had paid attention on the T-bill yields and FED funds rate for the recent 3 weeks would not be surprised by the cut for the de-facto FED rate had been between 0.12% and the lowest -0.012%.

LIBOR have also been driven down to 88pts (3month) and 185pts (6month) respectively. 3month T-bill yield rate is 6pts. TED hence has narrowed down to 2-digit: a difference of 82pts.

Long-term finance rates have dropped but the risk premium has remained outstanding by far: 516pts (5 year) and 592pts (10 year) respectively. It echoes by the corporate bond market in which investment grade and junk grade bond yield rate are 7.22% and 22.49% respectively. Comparing with the figures with last month, the 75pts cut have not exerted the same effects on corporate bond markets. It means the worries on the survival of corporates have not passed yet.Such lack of confidence on corporate survival, convoluted with the competition by treasuries markets, makes the last night rally as prescribing a dying patient cocaine as placebo. Had the economic conditions not changed and FED continued to supply money through manipulating bond price expectation, the stock market eventually will subject to a big adjustment after the rally.


Felix Kan said...

WTF -0.012% FED rate??
so FED has to PAY borrowers?

David TW Chan said...

Yes. This is a way to supply money ma.