The money market continues to function increasingly better than in
August when conditions required enormous liquidity injections by both the Federal Reserve and the European Central Bank.
The decline in both commercial paper rates and LIBOR illustrate the improvements. Today, the rate paid on 30-day asset-backed commercial paper has fallen to a new low for the year, to 4.88% from 5.08% a week ago, 5.33% a month ago, and from the peak of 6.35% on Sept. 12. Granted, some of the decline has been from the pricing in of an expected interest rate cut from the Federal Reserve. But even factoring in the cut, at 38 basis points, the spread between the 30-day asset-backed commercial paper rate and the fed funds rate is much lower than the peak of 110 basis points.
It is a similar but not as glaringly positive story with 30-day LIBOR,
which has fallen to 4.96% from the peak of 5.725% on Sept. 7. Reflecting expectations for a rate cut, as well as reduced anxieties, the current rate is down 25 basis points from two weeks ago. Here, too, the yield spread to the expected funds rate of 4.50% is tighter than at the peak, but it is still high, reflecting lingering strain. It will be important to watch this spread in the aftermath of the Fed's cut to track the degree of strain remaining.
These gains make it difficult to see why the Fed would consider a 50-basis-point cut, given that economic data, which not strong, continue to show moderate economic growth.
Tony Crescenzi Blog FOMC Outlook for Next Week 10/26/2007 3:24 PM EDT Expect a rate cut of only 25 basis points. Here's why.
Tony Crescenzi Blog Steel Output Holds Up 10/26/2007 11:12 AM EDT The strong global economy is boosting production of the construction metal.
Tony Crescenzi Blog Dollar Drop Reducing Fed Need 10/26/2007 10:11 AM EDT The Fed's trade-weighted dollar index has made a notable decline recently.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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