Interest Rate Roundup

Monday, September 15, 2008

Apres Lehman, le deluge

I am very busy at the "day job" -- as are many of you, I'm sure, given the market events. So I'll just keep it short and sweet (actually, not so sweet, given the news) ...

The fourth biggest broker in the U.S. – Lehman Brothers – has filed for bankruptcy. Merrill Lynch, the firm with almost 17,000 retail brokers and assets of almost $1 trillion, was forced into the arms of Bank of America. AIG, the biggest insurance firm in the country, is desperately seeking to shore up its finances. It’s reportedly planning to dump assets, raise capital, and asking the Federal Reserve for a $40 billion bridge loan.

The Fed is reacting by agreeing to take on all kinds of collateral in exchange for loans. It is also boosting the size of its TSLF auctions. Who knows what the rest of the day will bring. But in the early going, the Dow is off more than 300 points, 10-year yields are plunging 20 basis points, swap spreads are blowing out, and the VIX index is toying with the 30 level. Guess this post of mine from the other day was right on target.

The economic data out today, meanwhile, was not good. Industrial production dropped 1.1% in August, far worse than the 0.3% decline that economists were expecting. The Empire Manufacturing Index for September also came in worse than expected: -7.4 vs. a forecast of +1.

UPDATE: The Dow closed down 504 points. The S&P 500 plunged 4.6%, the worst day since right after the 9/11 attacks. The VIX soared almost six full points to 31.62. Long bond futures skyrocketed by 3 10/32 in price, while 2-year Treasury Note yields plunged a whopping 45 basis points to 1.75%.


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