Thursday, April 03, 2008

Credit is easing (cautiously), part II

More evidence of easing credit conditions amid swirling rumors of another big 5 investment bank having severe cash problems. My retort to this line of thinking is that if "traditional" markets, such as repos, etc. have dried up, why not borrow from the Fed for a pittance?

Stone & McCarthy (Princeton) -- The Fed announced the results of the Term Securities Lending Facility (TSLF) auction. The auction opened at 200PM and closed at 230PM.

This was a "Schedule 1" auction, which includes all collateral that is eligible for tri-party repurchase agreements arranged by the NY Fed's Open Market Desk.

$46.9 bln was bid in today's $25 bln auction, for a bid/cover of 1.88. The stop-pout rate was 16 bps. These results compare to last week's "Schedule 2" auction, which generated a total bid of $86.1 bln for the $75 bln auction, for a bid/cover of 1.15, and a stop-out rate was 33 bps.

Both of these auctions tell a similar story in the sense that the dealers did not have to bid aggressively to secure collateral. Dealers paid a modest 6 bps above the stipulated minimum bid which is 10 bps for "Schedule 1" collateral auctions; last week dealers paid a modest 8 bps above the minimum bid which is 25 bps for "Schedule 2" collateral auctions. There is no sign of a distress bid. While there was a higher bid/cover ratio in today's auction, that needs to be considered in the context of the smaller auction size of $25 bln vs last week's $75 bln.

We think that both of these auctions are good news in the sense that they do not convey any sense of urgency on the part of dealers to finance positions. A lack of urgency suggests that there is also a lack of major stress. Today's auction did generate $46.9 bln bids, so there is a demand for some financing assistance just as there was a week ago. However,

This week's results again suggest that financing stresses may be less severe than feared because this first TSLF auction did not attract massive interest.

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