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That Stubborn Financial System Stress Isn’t Going Away…

 April 14, 2008 12:50 PM




That stubborn financial system stress isn't going away…

Euro Money-Market Rate Remains at Highest This Year, EBF Says: "The cost of borrowing in euros for three months stayed at the highest this year, according to the European Banking Federation.

The euro interbank offered rate, or Euribor, rose about half a basis point to 4.75 percent, the highest level since Dec. 27, the EBF said today. The one-week rate was little changed at 4.23 percent."

This means risky assets, such as equities, are going to enjoy a rough ride in the near future.

Nothing Special With Treasuries as Fed Has Mortgages (Update5): "The dollar isn't the only casualty of the Federal Reserve's rescue of seized-up credit markets. Bond traders are finding there is nothing special about Treasuries anymore, now that the Fed accepts substitutes for government securities as collateral -- having concluded it wasn't enough to reduce the benchmark interest rate for overnight bank loans six times since September.

As recently as March 21, Treasuries were in such demand that traders were willing to lend cash at rates 2 percentage points less than the Fed's target for overnight loans if they could obtain the securities as collateral. Now, the gap is back in line with the 0.06 percentage point average in the 10 years prior to August, when subprime mortgage losses spread.

The $6.3 trillion-a-day repurchase agreement, or repo, market is a barometer of sentiment because it's where firms finance trades. A narrowing of the spread between the so-called general-collateral and federal-funds rates may suggest declining demand for U.S. government debt. Treasuries have lost 0.8 percent on average since March 20, when the central bank expanded the type of debt it would take in return for the securities to include mortgage and commercial real estate bonds."

Sounds good no? Wait for it…

"Since dealers typically use repurchase agreements to finance their holdings, movements in the rates affect the cost of holding the securities in inventory.

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