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Crescenzi: Patience Will Win With Credit Spreads

Ideas:

- Libor up at new high
- Peaks in spreads lagged the ending of past crises
- Investors with steadier nerves than the consensus will win

Substantial strains continue to exist in the money market, as evidenced by Libor and Treasury bill rates. Today (Wednesday), 3-month Libor was set at 3.476 percent, up a whopping 26.5 basis points on the day -- and the widest spread to the fed funds target since 1987.

The yield spread had been around 80 basis points for months before this latest hiccup (a "normal" spread would be closer to 12.5-25.0 basis points). Three-month T-bills are trading at 0.42 percent, down 28 basis points on the day.

Some of the strain in the money market undoubtedly reflects the forthcoming quarter-end, which is boosting demand for the most liquid assets, from Treasury bills to cash.

There are also pressures from Japan, which faces its fiscal half-year end, an event that even in normal times results in a repatriation of capital into Japan. Uncertainties over the U.S. plan to purchase distressed assets are of course contributing to the money market problem, not only on an institutional level, but on a retail level, as the proliferation of news on the plan is affecting the mood on Main Street.

I mentioned yesterday a pattern that deserves repeating: Libor, the TED spread, and other fear gauges have historically taken time -- at least 2-3 months -- before settling down following previous financial shocks. Such was the case following the demise of Long-Term Capital Management and Russia's default in 1998, and after the 1987 stock market crash.

It is only human nature for frayed nerves to take time to settle down. The key to whether it does is foreign involvement in U.S. markets, which is vital toward financing both the government's initial outlay (the $700 billion price tag massively overstates the actual price tag because the government is buying distressed assets at equally distressed prices; the U.S. could turn a profit), and its annual deficits.

No new ground has been broken in the dollar and I do not expect that it will for many reasons -- although confidence is an unpredictable variable, as many financial companies have found out this year.

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Tony Crescenzi
Tony Crescenzi

Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of the forthcoming book, "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."Crescenzi is a contributor to RealMoney.com."

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