Fantastic news! And it looks like things are going to be getting better!!!
Global interbank lending rates fell sharply Monday, fueling hopes that central banks have succeeded in their massive efforts to unlock credit for cash-strapped banks and borrowers.
Other measures of stress in credit markets ebbed to levels not seen in more than a month….
Money markets plunged into near-chaos a month ago, contributing to U.S. and European governments’ taking over part or all of some banks and financial companies.
However, credit availability appeared to be on the increase recently.
Encouraged by better credit conditions, traders shifted money to stocks and riskier investments from cash and low-risk U.S government bills.
The move sent Treasury bill rates to their highest in about a month and demand for new six-month bills to its weakest since April.
Less jittery banks charged each other less for dollars in the unsecured lending market.
The London interbank offered rate for overnight dollars fell to a 4-year low, drifting closer to the Fed’s target federal funds rate of 1.5 percent.
Traders widely expect the Fed to trim its target rate on overnight loans of surplus reserves between U.S. banks by at least another quarter percentage point after its two-day policy meeting next week.
More telling about a credit thaw was the plunge in longer rates suggesting banks grew more comfortable about lending rather than just hoarding cash….
Overnight rates on unsecured CP dropped below 1 percent on Friday, while 30-year unsecured CP rates averaged as low as 1.43 percent, according to Fed data released Monday.
More help is on the way in the CP market, where many companies had relied on funds for their day-to-day operations.
The Fed will launch its program to buy high-quality CP next Monday.
Ok, so a translation…
Basically, 3 things have happened and 1 more thing is coming…
First, banks began to lend eachother money again and felt a bit better about it. The proof of that is in the interest rates they are charging eachother. The inter-bank rates are dropping, which means they feel the risk of loaning each other money is falling.
Second, traders felt better about the economy in general, stopped hoarding their money away and started investing in the stock market and in the general economy again, pushing the markets up. The fear of risk is going down and money is starting to flow again… thus the 400+ point jump in the DOW. This is fantastic news!
Third, banks are also feeling better about companies and are loaning to businesses once again. Companies often borrow money overnight to meet their payroll and day-to-day operation expenses. This short term business borrowing for operations purposes is called the “CP” market. It was squeezed over the last month or two because no one knew who was solid and who was not. Now the banks are now feeling better about the wider economy and lending in the “CP” market again and feeling less risky about doing it, as is evidenced by the rate drop in this market sector as well.
Fourth is the coming government investment in the CP market which will improve the lending rates, margins and volume. This is great news for businesses as it will make their operating costs cheaper and provide much needed liquidity, and thus making the wider economy much more solid!
All in all, we had a rough couple of months, and while there are still a few things to shake out, the foundations of the economy are all back into place and getting on to solid ground again!
The political implications of this bode well for McCain and not so well for Obama, who has banked (pardon the pun) on a failing economy to put him in the White House.
If the stock market continues to improve steadily, and fears of economic collapse dissipate in the next couple of weeks, there could be a major shift in the polls.