Want to loan the US Government money for 3 months? If you bought a 3 month T-bill yesterday, the annual yield you’d earn was .16%. (Notice the decimal place.) The 1 month bill is/was down to 0%. As one bond analyst said, “There's a lot of fear in the marketplace. A lot of money is coming out of equities. It has to go somewhere. 3 month Treasuries are being bid sky-high.” The Treasury’s 3-Month Bill rate is the lowest since 1954, if not before. There is so much doubt and fear in our credit markets that investors abandoned higher-yielding assets for the safety of the shortest-term government securities.

Said another way, let’s say you sold all of your stocks, as money managers seem to be doing, and put the proceeds in the bank. The bank went into the market and bought short-term Treasury securities, like 1-month or 3-month T-bills, which are very liquid. (They are constantly doing this: paying depositors .25% or .5% on their deposits, and taking the cash deposits and earning 2-3% on their safe Treasury holdings, and pocketing the spread.) Now, however, with all of the money coming out of the stock market and going into cash in banks, and all of the uncertainty, the demand for short-term Treasury instruments is very high. Prices are going up, and this pushes rates down. The 1-month T-bill is paying 0%. The 3-month T-bill is paying an annual yield of .15%.

This was not directly impacting mortgage rates, or yesterday’s 10-yr Treasury yield of 3.38%. It was mostly focused in the short-term Treasury market due to the immense amount of cash coming out of the stock market. Interestingly, in somewhat of a sleight of hand, mortgage prices improved slightly in spite of mortgage spreads widening (Treasury rates dropped but mortgage rates dropped less). There is still good liquidity in the Fannie/Freddie & Ginnie (FHA) mortgage markets, and the spread between mandatory and best efforts loan sales has jumped to 50 basis points and sometimes more.

Someone was cranking up the rumor mill yesterday. Gossip shot around the world: “Morgan Stanley Considers Merger With Wachovia”, “Wells Fargo, Citi Have Expressed Preliminary Interest in Washington Mutual”, “WaMu Puts Itself Up for Goldman-Run Auction”, “Wells Fargo and Goldman Sachs in merger talks”, and lastly, “Mortgage bankers enjoying current underwriting guidelines.” Remember that Morgan Stanley and Goldman Sachs are the last two large independent brokerages on Wall Street…

Suddenly my Dad’s mouth is worth a heckuva lot more! Not only was the DOW down 449 points, and short-term Treasury rates near 0%, but gold posted it largest one-day price increase in history. Lastly, HSBC became the top world bank in terms of market cap as their stock was steady while China's ICBC’s dropped.

Overnight Central Banks around the world, including our Federal Reserve, almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the crisis. The Fed increased the amount of dollars that the European Central Bank, the Bank of England, Canada, the Bank of Japan and other counterparts can offer from $67 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' Investors stockpiled money on concern more financial institutions would fail after the bankruptcy of Lehman Brothers and the problems with AIG. The cost to hedge against losses on U.S. government debt climbed to a record yesterday. What are we up to today? Mortgage prices are worse by .250, and the 10-yr Treasury is up to 3.45%.

Speaking of volatile rates, an Italian walked into a bank in New York City and asked for the loan officer. He needed to borrow $5,000 for two weeks, but he was not a depositor of the bank. The loan officer said that the bank would need some form of security for the loan, so the Italian handed over the keys to a new $250,000 Ferrari out front and they could hold it until the loan was paid off in two weeks. The title was produced and everything checked out, the car was driven into the bank's underground garage and parked, and the loan granted at 12%. 
Later, the bank's president and officers all enjoyed a good laugh on the Italian for using a $250,000 Ferrari as collateral for a $5,000 loan.

Two weeks later, the Italian returned, repaid the $5,000 plus interest of $23.07. The loan officer said, “Sir, we are very happy to have had your business, and this transaction has worked out very nicely, but we are a little puzzled. While you were away, we checked you out and found that you are a multimillionaire. What puzzles us is, why would you bother to borrow $5,000?”
The Italian replied: “Where else in New York City can I park my car for two weeks for only $23.07 and expect it to be there when I return?”

Rob