Junk bond defaults below 3%

In journalism, they call it burying the lede, or focusing on the wrong piece of information in an article. Reuters does that here, saying that S&P expects junk bond defaults to rise to a 6-year high of 7.6% next year from 2.68% today. Shouldn’t the story be that 15-months into the greatest credit crunch since the Great Depression, junk bond default rates are below3%. 97% of high-yield bond issuers are current while investment name credits like Lehman and AIG no longer exist in their original forms? That’s pretty remarkable, and a rare ray of hope, against a bleak economic landscape.

Credit markets not thawing fast enough for market’s taste

Banks are still having difficulty accessing all the dollar-liquidity they need despite the heroic steps outlined by governments around the world. Term Libor rates have eased at the margin but have not tumbled to their historic averages. They are only about 25 bp lower than they were at the height of the crisis; they should be hundreds of bp lower. 1 month T-bills are yielding a measly 5 bp as investors continue to seek safe-havens. We’ve got a ways to go before all the policy actions of recent days begin to bear fruit. As long as this is the state of play, defensive plays are the way to go, keeping JPY in demand

Trichet says further global rate cut possible; inflation expectations under control

I guess asset price deflation and a collapse in oil have finally gotten the attention of the ECB. Trichet, in the immediate aftermath of the G7, said a global rate cut is possible as inflation expectations are under control. Close cooperation among central banks is essential, he says.

There is no way he would raise the notion of a rate cut at this time, at this place without intending to follow-through. They better act on Monday.

UPDATE Saturday evening: Reuters headline did not make clear that Trichet was speaking in the past tense about rate cuts, so forget about a rate cut Monday. Pardon the misunderstanding.

Separately, Italian finance minister Tremonti says “Basel II is dead”. Basil II was the basis for mark-to-market accounting and capital adequacy standards.

Finmin Steinbrueck of German holds out hope for a German bank capital infusion at the EU summit on Sunday.

Treasuries doing what you’d want them to do, sorta

Yields on US Treasuries are rising rapidly this afternoon but so far it’s not clear its for the “right” reasons.  One would hope that investors would feel comfortable moving out of the relative safety of US government paper and put money to work in other areas of the still-frozen credit markets. At the moment, it just looks like fear of supply as the US deficit rises to fund all the new programs. We’d feel a lot better if stocks were higher and gold lower in addition to the higher bond yields.

A steep yield curve can be eyed as a subsidy to the banking system as firms will be able to borrow at 1.5% from the Fed and buy 10 year Treasuries at 3.75%. This is how the Fed reflated the banking system in the early 1990s after a real-estate bust and the savings and loan debacle.

Something stinks in Denmark

The Danes just raised rates 40 bp to 5.0% in order to re-establish a positive rate spread versus the ECB. They also intervened to supported the Krone. This begs the question what benefit does Denmark enjoy staying outside the euro if it feels it needs to maintain a higher interest rate and does not take advantage of a weaker currency. Very odd indeed.

The rest of the world is cutting rates, you silly twits!

Flight from quality

If the last three weeks have been all about a flight to quality than I guess today can be characterized as a flight from quality. US T-bill yields are rising as investors take comfort in the Fed’s latest action, shoring up the commercial paper market. Yields are still ridiculously low, but at least they are double digits, as opposed to yesterday. At the moment, you can get a robust 0.45% on your money for one months, up 33.5 bp from yesterday’s close. Further out the curve, yields are up 8-9 bp.

EUR/USD has partially filled the gap from early Monday in Asia, trading as high as 1.3739 as risk aversion lessens. EUR/JPY trades at 140.50, up 5.5 euro cents from yesterday afternoon.

Australia, India and now Israel cut rates

Easier policy is being implemented around the globe with Israel the latest to join the procession. The BOE is expected to join on Thursday at the latest. The Fed and the ECB remain on the sidelines to the chagrin of the  equity markets.

Low rates for you!

As we noted yesterday, when you want to lend or invest money, yields these days are very skimpy. Well they just got a whole lot skimpier after the 35-day bills sold by the Treasury to fund the extraordinary bailouts underway at a yeild of just 0.05. That’s right, Japanese-style interest rates.

EUR/USD and Cable are jumping, perhaps on the low yields. A US custody bank is said to have bought a very large slug of cable in the last little while.