Archive for Money Market Account
November 19, 2008 at 6:13 am · Filed under Money Market Account
Months after coping with the highest inflation in more than a decade, China’s money market is gearing up for a fresh shock: deflation.
The risk of consumer price inflation turning negative early next year looks set to leave the market awash with idle funds, crush the upward slope of China’s bill curve, and push banks into buying bills at yields below their market funding costs.
“Market expectations for aggressive monetary easing will strengthen even further because of serious deflation in producer prices early next year. Deflation could have a bigger impact on the economy than inflation,” said Xing Ziqiang, analyst at investment bank China International Capital Corp (CICC).
Early this year, talk of deflation in China would have seemed absurd. Consumer price inflation hit a 12-year high of 8.7 percent in February, propelled by rapid economic growth and surging global prices of oil and other commodities.
But the global economic crisis has reversed the trend. Chinese inflation tumbled to a 17-month low of 4.0 percent in October and is expected to keep falling; CICC predicts inflation of just 1 percent early next year and says it could turn negative, depending on movements in food prices.
Deputy central bank governor Yi Gang said last week that the focus of both monetary and fiscal policy next year would be to avert the threat of deflation.
FALLING PRICES
China is no stranger to deflation; consumer prices fell 0.8 percent in 2002, 1.4 percent in 1999 and 0.8 percent in 1998.
But more is at stake for the money market this time. Rapid growth of the banking system, reforms such as the introduction of interest rate derivatives, and rising debt issuance have boosted trading volume in the interbank bond repurchase market more than fivefold since 2002.
Bill market trading over the past few days suggests banks have actively started preparing for the possibility of deflation.
The indicative secondary market yield on the central bank’s one-year bills <CN1YNFIX=R> slid to a 29-month low of 2.3290 percent on Monday, for a drop of 67 basis points since the start of this month, Reuters Reference Rates show.
That brought it well below the seven-day bond repurchase rate <CN7DRP=CFXS>, a key funding rate for banks, of 2.70 percent — showing some banks have abandoned their traditional yardsticks for gauging the value of bills, as expectations for further falls in bill yields make them desperate to buy at current levels.
Over the previous two years, the one-year bill yield had generally stayed about 100 bps above the seven-day repo rate, except during brief funding squeezes caused by large initial public offers of equity.
“Traders are eager to buy safe-haven central bank bills, even if that means accepting lower yields than repo rates, because they’re pricing in deflation,” said a trader at a European bank in Shanghai, who declined to be named because he was not authorised to speak publicly to media.
In the last few weeks, China’s central bank has followed its overseas counterparts by injecting large amounts of funds into the money market, as it seeks to encourage banks to lend to companies, ease jitters over counterparty risk, and prepare the market to absorb big bond issues that are expected to fund the country’s economic stimulus package.
http://www.reuters.com/article/marketsNews/idUSSHA32525620081119
November 17, 2008 at 7:22 am · Filed under Money Market Account
Russia’s Mosprime overnight inter-bank money market rate fixed at 22.67 percent on Monday, the highest since the rate began to be calculated at the start of 2007 and more than doubling from Friday’s 9.83 percent.
The surge in money market rates has been caused by companies scrambling for roubles to meet tax payments — an estimated 200 billion roubles is due on Monday.
Rates along the whole Mosprime spectrum — from overnight to six months — fixed above 20 percent.
(Reporting by Toni Vorobyova) Keywords: RUSSIA MONEYMARKET/
(antonina.vorobyova@reuters.com; Tel: +7495 7751242, Reuters Messaging: antonina.vorobyova.reuters.com@reuters.net)
http://www.forbes.com/afxnewslimited/feeds/afx/2008/11/17/afx5701272.html
November 10, 2008 at 8:11 am · Filed under Money Market Account
Neither the recent massive money market injections, the coordinated lowering of interest rates nor the use of public funds to recapitalise banks have done much to restart interbank lending. This action did not solve the underlying problem preventing interbank lending: extreme information asymmetry.
The increasing spreads and shortening maturities in the interbank market reflected the banks’ increasing uncertainty about the quality of their counterparties. In turn, this adversely affected asset values, further increasing uncertainty.
Capital injections or cheaper central bank liquidity does little to address banks’ fears about large loan losses, since neither action reduces the amount of bad assets. It certainly does not show who holds these assets. Hence, such actions do not encourage interbank lending.
Indeed, even a completely nationalised bank, such as Fortis in the Netherlands, had almost no access to the interbank market. If this continues, the government will end up owning the entire banking system. Surely that will start interbank lending, but at a huge cost.
The fear about counterparty risk became extreme. The spreads between secured and unsecured interbank lending between leading banks indicated last week that one in 20 of the big banks was expected to fail.
Resorting to desperate measures, the European Union heads of state agreed as part of their programme to guarantee interbank lending, leading spreads to reduce. After all, with guarantees, information about counterparty quality is not needed.
This indicates that if it were possible for banks to better identify which banks are reliable, interbank lending would pick up. Unfortunately, in the absence of reliable market prices, banks do not know how to value their own assets and liabilities, not to mention understanding what is behind the balance sheets of their counterparts.
The market is thus unable to identify the institutions that hold excessive amounts of toxic assets and which do not. Making things worse, by availing themselves of government largess, the banks signal that their toxicity may be excessive, whether warranted or not.
Banks do not need complete information about the counterparties to lend. In normal times, banks rely on several mechanisms for providing the necessary information, such as accounting disclosures and credit rating agencies. In the current environment, accounting disclosures on complicated structured products are insufficient and the rating agencies are no longer trusted.
Therefore, breaking the information asymmetry needs stronger measures. While difficult, painful and undoubtedly resisted by some of the banks, one alternative template exists: Information exchange. Before takeovers and mergers, companies pore over each others’ balance sheets. Without this due diligence, the information asymmetry is too large a risk for a merger.
A similar process of information exchange could help break the information asymmetry currently preventing interbank lending. If the central banks and governments pressured the largest banks to open their books to their counterparts, in a manner similar to bank mergers, banks would be able to confidently lend to each other, or refuse lending with good reason.
It is quite likely that banks would be able to offset many of their toxic assets, so long as they had the required information. The government should be ready to take over banks denied access to the interbank market even after such disclosures. It would eventually have had to do that anyway.
While such disclosure may be resisted by banks, the costs of disclosing possibly superior proprietary pricing information are exceeded by the public private benefits of information revelation. Disclosure about the most contested parts of the banking book would establish the necessary trust for the money market to restart, so long as this process was coordinated between the major banks.
The scheme should therefore be initiated by the major banks, and subsequently expanded to include smaller institutions. The six largest cooperative banks in the European monetary union area last week announced to voluntary start such a scheme. Spreads are already coming down.
By following this approach, banks obtain the necessary confidence for unsecured interbank lending, without needing the massive resources currently on offer from the government. This would be cheaper for the taxpayer, less intrusive for the banks and more effective than the alternatives.
http://blogs.ft.com/wolfforum/2008/11/money-market-on-strike/
November 8, 2008 at 2:00 am · Filed under Money Market Account
It’s now more than a month since I considered taking advantage of a downward market by dollar-cost averaging at specific times. Yes, I’m “timing the market.” After making a few newbie mistakes when buying on the dips, I’ve refined my strategy.
At Vanguard, I have cash in a tax-exempt money market fund, which I will draw from on certain days when the market drops. The cash is what I consider marked for long-term investment. I won’t need to access this money for a while, except if I have a major emergency that depletes my short-term cash. The money market fund, which admittedly is not as great an aption as it was one month ago due to a significant drop in its yield, allows me to quickly transfer small amounts of money to a Vanguard stock market mutual fund when the time is right.
Unfortunately, I don’t have a lot of time to check the market’s performance. After yesterday’s 5% drop in the S&P 500, I thought I had missed my chance to buy another $500 worth of VTSMX.
The market offered me another chance today, falling a further 5%. I happened to check at the right time today and was able to squeak in a purchase of VTSMX in my brokerage account at Vanguard. I may not have the ability to precisely time the bottom, whenever it may come, but strategically buying on poor performing days is one safer way to approach that goal.
So far, this is only my second timing purchase after setting up my Vanguard account properly. I don’t plan on doing this often, but the second day in a row of 5% declines seemed like a fair opportunity.
http://www.consumerismcommentary.com/2008/11/06/buying-the-stock-market-on-the-dips/
