Bond Outlook [by bridport & cie, October 3rd 2007]
| For those of us who view the recent stock market rally with bemusement, there are two very real issues threatening the US economy for the rest of the year: the liquidity crisis and the underlying economy. Let us consider each in turn. |
| There are signs of a modest return in bank liquidity. The spread of 3 month USD Libor over T bills is still at about 120 bps (compared with 40 earlier this year), but it is settling down. The banks are apparently lending to each other, but learning to live with significantly higher interest costs. Some of the pipeline of underwritten loans has now been emptied (notable KKR), but there is still a lot left on the banks’ books. Our own business of finding willing counterparties is still “heavy going”, but a little less so. |
| It is certainly to the good that the major banks are “revealing” their write-downs on CDOs. The numbers are gigantic, rarely under USD 1 billion and up to four times that amount depending on the bank. |