Please, click here to read this article in pdf format: august-5-2009

Very interesting trading session yesterday… As you can see in Chart 1 below, the morning started with a very weak USD and a steepening move in Treasuries. By 1pm, when the $31BN 4-week bills auction took place, the 2039s had plunged from 98-08 to 95-25, lifting stocks and bringing the VIX index from 26.16pts to 24.93pts. The response didn’t take long, and as you can see, in the next hour, the Canadian dollar gave back a cent. However, it was also influential the Bank of Canada’s C$1BN term purchase and resale agreement transaction, which goes to my point that the global coordination in monetary policy is at the order of the day and any rebellion will be thwarted with violence by central banks around the world!

Chart 1: Intraday 30-yr Treasury vs. CAD        Chart 2: US Yield Curve  (Source: Bloomberg)

The yield curve remained slightly steeper though (Chart 2), but at least we saw consistency in the FX market, rewarding the USD. I don’t want to get too much ahead of myself, but this obviously indicates strength in rally in stocks. However, we can’t believe in everything we see, right? To concentrate on what matters, liquidity, I thought I would show again a chart on the Libor-OIS spread (Chart 3). As I’ve written before, this spread measures for banks the cost of “renting” their balance sheet. As it cheapens, liquidity is reallocated. And cheapened it has. In the last week, it has fallen from 29.4bps to 27bps. The trend is from the upper left to the lower right, unequivocally. As long as we see this trend drifting to pre-crisis conditions (around 10bps) we should see a bid for risk assets, both in credit and equities, but…the CDX Inv. Grade index closed +1.5bps wider today (unlike High Yield 12), at 112.5/113.5bps. Do you think this is a “technical”?

Chart 3: Libor – OIS spread, July 20th to August 4th, 2009

(Source: Bloomberg)