Central Banks oil the machine

Central Banks around the world last night devised a plan to inject massive amounts of liquidity into the financial system. The amount of dollars available for auction around the world this morning stands at $247 billion. As investors around the world hoard cash, central banks are stepping in to replace those funds. There is broad based participation from central banks in the US, the ECB, the Bank of England, the Bank of Canada, the Swiss National Bank, and others.

You'll notice below that despite the massive injections earlier this week we still have the Fed Funds effective rate trading 100 bps over the Feds target rate. Funding pressures have eased some over the course of the week but the market obviously still has problems.

The 3-month T-bill yield is up 300% from yesterday...it's now trading at 9 basis points.



I've attached a graph of 1-week Libor to point out how dramatic the funding issues became this week. With almost $250 billion in liquidity being provided by the central banks of the world over, we should begin to short term borrowing costs begin to fall shortly.






Equity Index futures indicated a slightly higher open for US stock markets and that appears to be holding as the markets open. The Dow, S&P 500, and NASDAQ are all up at the moment.

What I'm seeing and hearing is that Wall Street trading desks are still sitting on their hands. There are plenty of willing sellers, but nobody is buying. People are trying to shrink inventories. Everyone is watching to see what happens to Washington Mutual, Wachovia, and Morgan Stanley. At the moment I don't see anyone else on the radar, but that could change. Headlines are beginning to print that WaMu may be purchased in pieces by Bank of America, JP Morgan and Goldman Sachs.

The FDIC still has 116 banks on the problem bank list. The Deposit Insurance fund is still woefully underfunded. If you'll recall, IndyMac took down 17% of the available insurance funds in the FDIC's pool. That was one of 117 banks on the list. Granted they were a $32 billion bank but there are 116 banks behind them...all of which will use a piece of what's left. I imagine this will begin to get headline status over the next few weeks.

Expect more volatility this week and next. I'm hearing that trading desks around the country may not get back to normal until after quarter end. And oh what a quarter end it should be. We'll keep you posted.

It's a buyers' market right now. Be on the lookout for cheap bonds as Wall Street firms are forced to sell into a market with no liquidity...they'll have to start dropping prices to entice someone to take bonds off their hands. I'm always a fan of doing unto them as they would do unto me.

If you have any questions or if there is anything I can be doing for you just let me know.