The coordinated central ban effort today to restore some level of activity to stressed funding markets, in which five central banks cut their policy rates by a half a point and China cut rates by 0.27%, is a resounding failure. From Bloomberg:
Overnight corporate borrowing costs jumped, Treasury bill yields fell and the bond market remained all but closed after central banks worldwide cut interest rates, showing unprecedented government intervention was failing to aid companies struggling to finance themselves.
Overnight rates on dealer-placed commercial paper rose 56 basis points to 3.5 percent, while one-day yields on the debt backed by car loans and credit cards increased 43 basis points to 5 percent, according to data compiled by Bloomberg. Investors sought safety in three-month bills, whose rates fell as much as 26 basis points to 0.5 percent. Two issuers sold $750 million of U.S. company bonds this week, compared with the weekly average this year of $16.8 billion….
The Fed, ECB, Bank of England, Bank of Canada and Sweden’s Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn’t participate in the move, said it supported the action. Switzerland also took part. Separately, China’s central bank lowered its key one-year lending rate by 0.27 percentage point.
“The reality is there’s no private sector balance sheet willing to step in so the Fed and the Treasury are becoming the only balance sheet,” said Mark Kiesel, executive vice president at Pacific Investment Management Co., the manager of the world’s biggest bond fund. “In a market that lacks trust and confidence the private sector is on the sidelines.”
Further confirmation comes from John Jansen at Across the Curve, who also tells us that the pending participation of the Federal Reserve in the commercial paper market is having the unintended consequence of keeping activity on hold:
The central bank lowered the target funds rate to 1 ½ percent. The market is still dislocated as funds are trading around 4 ½ percent. (Several high ranking officials at the Federal Reserve have been observed applying for licenses as helicopter pilots.)
The money markets are still frozen and locked down. The only trading remains in the overnight sector. My source in this sector reports that AA banks would issue at levels 50basis points to 100 basis points cheap to libor but at the moment there are no bids against those offers.
Today the Federal Reserve is meeting with money market dealers to discuss the details of the CPFF. There are many still to be answered questions regarding charges and size. Until there is clarification of those ambiguities, the market will remain in its state of suspended animation.