Some Opening Comments October 7 2008

Prices of Treasury coupon securities have retreated in overnight trading as the gloom and doom which coursed through the veins of the market yesterday has faded somewhat. The worldwide equity rout of yesterday is more of a skirmish today. Most European exchanges are posting gains in the 1 percent to 2 percent area. Australian equities surged on a 1 percent rate cut in that country.In Asia the Hang Seng was closed and the Nikkei declined 3 percent as credit fears and recession fears have not abated there.

Futures trading suggests that US stocks will open modestly higher this morning.

In the money markets Libor has set 4 basis points lower in yield this morning. My contact in the money markets says that the mood is still apprehensive and the market has the feel of a patient on a gurney waiting for transport to the operating room.

The operating room metaphor relates to the talk in the market and the press and even here in the blogosphere that the Federal Reserve will act to ease the strains in the commercial paper market. How such a plan would work has been the subject of much speculation.

The money markets are still frayed and nervous as Iceland is in the throes of a liquidity crisis and UK banks face funding problems. Iceland is negotiating a loan from Russia and there are reports that her Majesty’s government will inject capital directly into some troubled institutions.

I think the conclusion is that the “in extremis ” state which prevailed in the short term money markets yesterday has given was to a cautious optimism . However, that cautious tone could quickly morph into fear once again if events overtake the market or if the Federal Reserve fails to placate participants with some sort of warehouse for commercial paper.

The yield on the benchmark 2 year note has climbed 5 basis points to 1.48 percent. The yield on the 5 year note has climbed 4 basis points to 2.48 percent. The yield on the 10 year note has increased 4 basis points to 3.50 and the yield on the Long Bond is 3 basis points higher at exactly 4.00 percent.

There is a dearth of meaningful economic data today. The market will takes its cue from activity in the equity markets and then from the words of Chairman Bernanke when he speaks “ex cathedra” at 115PM New York time.

Originally published at Across the Curve and reproduced here with the author’s permission.