Sunday, May 3, 2009

Credit market distortions, courtesy of your government(s)

WARNING:  what follows is not investment advice, but research.  Trade at your own risk.

As I’ve written (‘Animal spirits’ update, April 3, 2009), I think there’s an arbitrage to be made going long Baa’s and short Treasuries, maturity matched.  As “animal spirits” recover, risk premia of the normal out-on-the-curve variety will decrease.

The liquidity being force-fed into the system, meanwhile, is distorting (blowing away) risk-premia at the short end. 

Via: Contrary Investor

Maybe more than any other headline credit market indicator of the moment we believe Fed actions have distorted what used to be the prior “risk based” message of LIBOR.  And that cuts right to the conceptual heart of government intervention.  Just how the heck can the private sector assess risk and allocate capital correctly and efficiently when the Fed/Treasury/Administration is acting to help “misprice” assets and risk measures?  In our eyes, there will be no true recovery in the economy and capital markets until risk is being priced appropriately and all risks are known (the issue of transparency).  Make no mistake about it, the decline in LIBOR is not a result of credit market healing and the lessening of risk perceptions.  It’s a result of the Fed TAF.  And so once again, how do they step away from this intervention?

Read entire piece here:

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