It would make a difference to know who’s failing whom. For example, it seems we are clearly approaching nationalizations for some especially rotten banks; if their swapees are holding onto the goods in anticipation of an event of failure, perhaps there’s logic in the mayhem. Seems to me Lehman had stuff out on loan that wasn’t given back when it went *boink*. Then too, I would hope it’s a technical snafu. However you slice ‘n’ dice it, though, This Is Bad.

Whoever is trading on the money markets is at the margins, and not representative of the core (which is not trading at all).

When we globally nationalize the banks, and these banks start lending to others in the nationalized club, then we will be able to breath again.

When these were first revealed about 10 days ago, I mentioned in this blog that this was an extraordinarily serious development. This is a very big deal.

In fact it was taken so seriously that Paulson doesn’t care about a whopping 40 bp just to try to fix it….

I quote McKenzie:

“Investors have stopped lending cash to banks even in return for collateral such as US Treasuries. That has broken the chain of lending between numerous banks to such an extent that borrowed securities have not been returned.
These so-called “repo fails” prompted the US Treasury on Wednesday to re-open various Treasury issues and sell more debt. A greater supply of Treasuries could improve lending in the repo market over the next few days, said traders.”

Matt Dubuque

2) not only USTs are underperforming swaps, but the trend is set on all govt bonds now.
they were perceived as safe have and have been rallying strongly for a year, thanks to the crisis, and to the Funding squeeze. But these factors are fading now with much more supply coming (for the bailouts and because of the recession), and CB intervention which will become effective at some point, as they throw everything.
3)
but youre right, mkts are becoming more and more illiquid, and execution cost for big trades / auctions / any unwinding going up a lot, and causing volatility.

4) the ultimate step in the financial crisis would be for some govt auctions to fail. Iceland, but at a bigger scale.

5) for that to happen in the US, contrarily to the common opinion, i dont think it would come from the Chinese, Japanese etc… to capitulate on their USD, but it would take the loss of trust by American themselves instead, which would take out all their cash and open accounts oversease….flight of capital

Which mutual funds do you think are as FPA funds in terms of willingness to hold cash, focus on absolute return, patience to wait for prices to fall to buy targets, willingness to sell as prices rise close to sell targets, etc.?

I love reading you guys/gals comments, and would love your thoughts.

Much appreciated,

Dumb Money Retail Investor
(cash and TIPs since mid 2006)

There is some interesting stuff playing out in the 30 year sector of the swap curve. There has been chunky receiving in the 30 year sector by pension fund accounts that need duration. Separately, there were certain trades in exotic derivatives, which have gone sour, and has necessitated receiving in the 30 year sector by options desks hedging flattening exposure.

That would pull the 10-year swap along with it. I like Tony, but I don’t think he is right here. He is more of a money markets/ governments guy, not a corporates guy.

“The abrupt movements today are likely due to hedging- related activity by exotics trading desks due to the flattening of the spread between the 30-year and 10-year swap rate,” Liverance said. “This is a phenomenon that has happened before and I would not read any credit related issues into it.”