Friday, September 26, 2008

Keep an Eye on Credit Markets, Not So Much the Dow

Most people are focused on what the Dow is doing in the midst of the current financial crisis. But the hgeart of the problem is really in the credit markets.

According to,
the bond market primarily includes government-issued securities and corporate debt securities, and facilitates the transfer of capital from savers to the issuers or organizations requiring capital for government projects, business expansions and ongoing operations. Most trading in the bond market occurs over-the-counter, through organized electronic trading networks, and is composed of the primary market (through which debt securities are issued and sold by borrowers to lenders) and the secondary market (through which investors buy and sell previously issued debt securities amongst themselves). Although the stock market often commands more media attention, the bond market is actually many times bigger and is vital to the ongoing operation of the public and private sector.

Justin Lahart of The Wall Street Journal had these comments this morning:
Now, the stock market often seems out of sync with the credit crisis embroiling the financial system. Thursday was a case in point. The Dow Jones Industrial Average shot higher when the stock market opened on hopes that the bailout plan getting hashed out in Congress would offer a salve to the financial system. But the short-term credit markets that lie at the center of the crisis were telling a different story. Libor, a widely followed benchmark interest rate for many dollar loans between banks that is set each morning in London, jumped by its most since 1999, rising to 3.77% from 3.48. A similar measure set in the morning in New York, NYFR, also registered a sharp gain.

Jumps in Libor and NYFR are a sign that banks are becoming increasingly wary of doing business with one another. Thursday's move could have been a sign that credit-market participants didn't think Washington was moving ahead fast enough with its bailout plan, thought it is moving in the wrong direction, or that a major player is in deep trouble, said Michael Darda, chief economist at MKM Partners.

"It's very disconcerting," he said. "There have been several occasions when the credit market and the equity market diverged over the past year and in virtually every case it was the stock market that was wrong."

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