Trader’s Narrative

I mentioned last week that there was a mad dash towards “risk free” assets, namely short term T-Bills which drove their price sky high and caused their rate to crash through the floor.

Looking at the long term chart for the 3 month US government treasury bills the recent market dislocation is awe inspiring:

Believe it or not, we’ve had the sharpest drop since the 1987 market crash (not shown on chart). On September 11th 2001 we also came close.

While the discount rate was cut by 50 basis points on August 17th 2007 to 5.75%. The Fed funds rate still stands at 5.25%, although most are agreeing that it will be cut sooner rather than later.

The distance between the short term bond market rate and the Fed funds rate is now astronomical. When I pointed out the increasing gap between these two important standards, they stood 48 basis points apart.

Now, that gap ballooned to 213 basis points before closing today at 166 basis points. This is a HUGE discrepancy. The Federal Reserve can not allow it to continue. The message is now clearer than ever.

When I wrote that the Fed should cut rates immediately, some (including me and myself) thought I was nuts. Now it seems eerily prescient. I don’t take credit in either case. All I’m trying to do is read the market and listen to its quiet whisper.