Tony Crescenzi
Chief Bond Market Strategist
Miller Tabak + Co

There are two key points to make regarding the market response to the government bailout plan. First, the market was obviously priced for the likelihood of an agreement on a plan in the sense that any deterioration that would have occurred if not for the likely passage of the plan was already largely removed, which is why prices fell so sharply when the bill failed to pass.

Second, the plan does not make possible a rapid repair of all that ills the markets. It will obviously take time for the plan to have impact and all parties involved will be tentative in the early going. For example, the Treasury's initial purchase of distressed assets will probably be plain vanilla mortgage-backed securities.

In addition, those that are interested in dumping their assets onto the government's books will have to consider a number of factors ranging from the price of the securities, to the implications of having to give the government equity ownership and any loss of executive pay. (Crescenzi discusses the credit freeze with Jim Bianco in the video)

Frayed nerves take time to heal, which means that fear and anxiety will remain a major part of the pricing of financial assets. I have been noting, for example, that the financial crises of 1987 and 1998 were both followed by roughly two months where key fear gauges stayed high.

For example, both the TED spread and the yield spread between LIBOR and fed funds did not peak until two months after the crises of '87 and '98. It is human nature for frayed nerves to take time to heal after a shock--healing of any kind is more a process than an event. In 1987, the LIBOR/fed funds spread peaked at 206 basis points on October 19th, fell back to 31 basis points a few weeks later, and then widened steadily until early December before stabilizing for good.

Lawmakers React to Defeat

In 1998 there was a similar pattern. The yield spread between LIBOR and the fed funds rate did not peak until November 17th, 1998, which was roughly three months after Russia's default and Long Term Capital Management's failure roiled markets. The TED spread, a fear gauge that measures the yield difference between Eurodollar deposits and T-bill rates, took two months to peak after the summer's events.

It is human nature to remain anxious following a shock, which recent events obviously are. Keep in mind this top-down view, which fits with the message of my new book, Investing from the Top Down: the world's 6 billion inhabitants and the progress of mankind will not be held back just because 3 million people didn't pay their mortgages on time.

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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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