There is a great song by Bob Dylan entitled “Desolation Row”. It contains a line which is quite apropos this morning. Dylan, in the song says, “after the ambulances go,the only sound left is Cinderella sweeping up on Desolation Row”.
Wall Street is Desolation Row this morning. The ambulances (Fed and Treasury) have left the scene and solitary Cinderella is sweeping up the pieces.
Anyway, prices of Treasury coupon securities have skyrocketed in response to the sad and historic events which have swept across the financial landscape this weekend.The yield on the benchmark 2 year note has plummeted an eye popping 37 basis points to 1.84 percent. The yield on the 5 year note has tumbled 33 basis points to 2.61 percent. The yield on the 10 year note has crashed 23 basis points to 3.49 percent. The Long Bond has dropped 15 basis points in yield to 4.17 percent.
The 2year/10 year spread has widened dramatically to 164 basis points from about 150 basis points on Friday.
The 2year/ 5 year/30 year butterfly spread which I follow as an indicator of the relative movement of the belly of the curve versus the wings has exploded to 79 basis points from 65 basis points.
Equity markets are in free fall with European markets down,on balance, about 3.5 percent. Trading in futures markets indicates tht US equities will drop about 3 percent when trading begins in New York in several hours.
At this early hour oil is off about $4 and is trading in the middle 90s. It is off more than$50 from its peak in July. I wonder if any speculators have shorted the liquid on the way down. That would be horrible and they should return their profits to the government.
Today will be a very volatile trading session in every market. Watch the spread markets for clues. (I do not have any clues yet because the folks I speak to are not at their desks yet,) I will watch swap spreads ,the IG 10 , and the CDS on some of the troubled names still afloat.
I think the real economy is in serious trouble. Risk aversion is ascendant. Risk taking is shunned. Capital is a resource to be husbanded and conserved. Banks which have just funded a special purpose vehicle to provide liquidity to themselves will not be racing to make risky loans to Main Street or Wall Street. Leverage will be disdained and shunned.
Every revolution from the French Revolution to the sexual revolution has ended in excess. So ,too, will this revolution in the financial industry as banks and traders painfully and reluctantly reeducate themselves in the art of prudent risk taking.