8.50%. The amount the Brazilian Government has to pay for initiating a 3-month loan
0.0.0%. The amount the U.S. Government has to pay for the same loan

The credit crisis proved to be a major shock for the financial markets, sending institutional investors into a strong risk-aversion mode. This was reflected directly in the Treasury market, where investors bought the safety of the debt market, while shorting risky assets such equities and commodities.

With investors rallying into the Treasury market, the yield on the government debt fell to record low levels during the credit crisis, mainly during the last quarter of 2008.

Since then, the market has gradually returned to risk-tolerance, which means that investors are looking for higher yielding assets instead of the safety assets. These days, the VIX index is returning to the pre-credit crisis levels, while equity and commodity markets are surging towards yearly highs, suggesting investors confidence is high.

It seems that risk-tolerance does not mean anything at all for the Treasury market, since the debt market has continued to trade within the same tight range over the last half of year. This was best seen in the short maturity bill market, where the market is trading close to the 0.0% benchmark level.

Right now, the U.S. government pays a 0.1% yield for a 3-month loan, while for a 12-month loan pays 0.30%.

In other words, the Government pays $5000 for every $1 million that it borrows with a 3-month maturity, which is probably one of the best deals of the last few centuries. Making the matter even more ironic is that during the prior week the yield on the 3-month bill fell into negative territory in intra-day trading, meaning that the market was willing to pay an interest rate charge to lend money to the U.S. Government.

The last time that short-term yields fell into negative territory was after Lehman’s bankruptcy, in December 2008. All this points to something being wrong at one of the two ends of the interest rate equation. Either, the Treasury market is following the wrong event – most market participants say that the Fed’s pledge to maintain low interest rates low for a long period influenced the debt market or that the equity and commodity markets are deeply overvalued.

Either way the story goes, two points are clear: the economy is recovering, thus pointing to higher yields, while the FOMC rates cannot go any lower from where they are currently standing; yet again pointing to higher yields.

Maybe the dollar will find buyers after all, as the market starts to price in global interest rate increases from most central banks, only to realize that the U.S. yields are already up there with the top end of the market, in real terms.

Austrade launched its 2009 Financial Services Benchmark Report in conjunction with the Australian Financial Markets Association’s (AFMA) 2009 Australian Financial Markets Report last night at the Australian Securities Exchange.

Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, launched the two key reports which demonstrate the strength and resilience of Australia’s financial markets and how well they have fared in contrast to other major financial centres following the Global Financial Crisis (GFC).

Austrade’s Chief Executive Officer, Peter O’Byrne, said during the last twelve months Austrade has increased its focus on financial services and has a team which extends throughout Austrade’s global network. This dedicated specialist team works to promote exports from Australia’s financial sector as well as attracting potential international investors.

“Working with the industry, the team supports missions and activities to highlight Australian capabilities to offshore markets extending from North America and Europe and into the Asia Pacific region, reflecting our strengths in funds management, investment banking and growing areas, such as Islamic finance,” Mr O’Byrne said.

“Significant steps toward establishing a strong mutual recognition framework between financial regulatory authorities in Australia and overseas markets have been taken, leading to stronger relationships with markets in the US and China.

“The Australian Financial Centre Forum, set up to help position Australia as a financial services centre in the region, will report on further ways to improve the competitiveness of our financial system, address tax and regulatory barriers and improve market access offshore later this year” Mr O’Byrne said.

Austrade’s National Manager Financial Services, Gary Johnston, said the joint launch of the two publications highlights the strong working relationship developed with AFMA.

Mr Johnston said, Austrade’s 2009 Financial Services Benchmark Report highlights the liquidity and sophistication of Australia’s financial markets and also points to the strength of regulatory and governance frameworks and their transparency which has benefited Australia during the GFC.

This year’s Benchmark Report shows Australia’s financial sector fared better than most other major financial centres. The sector remains strong, continuing to develop as a regional and global centre with Australian based institutions seeking global mandates and viewing Australia as a base for their products,” Mr Johnston said.

“Finance and Insurance remains a significant sector of the Australian economy, and contributed 8.1 per cent to Real Gross Value Added during 2008-09. The sector remains well capitalised, with total assets for Australia’s financial institutions exceeding A$4.4 trillion – equivalent to four times GDP.

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The New Zealand dollar has been considered the high-yield currency among the majors for years. And, even though its benchmark lending rate is at a discount to its Australian counterpart, speculators still recognize the specialty the kiwi retains as a high income currency whereas others are graded for their growth potential and the health of their financial markets.

This elevates the influence of this currency amongst its peers and makes the RBNZ policy decision a meaningful event for the broader FX market.

The RBNZ Holds
It should come as no surprise to fundamental traders that the policy authority decided to keep the Official Cash Rate unchanged at for the third consecutive meeting at 2.50 percent. The economy is still struggling to pull itself out of recession yet inflation is still close to close to the central bank’s target level. More importantly, Governor Alan Bollard has issued commentary over the past months that have been relatively transparent with his intentions. Nonetheless, heading into the event, overnight index swaps were pricing in a 10 percent probability that the rate would be cut by 25 bps.

Putting the Decision into Context
When the decision to maintain the benchmark rate was announced, the market had to make the fine adjustment for the modest premium afforded to the possibility of a cut. More important, was the accompanied the decision. In regards to growth the first stepping stone to a turn in interest policy and therefore the kiwi dollar the prognosis was slightly more optimistic but certainly cautious. Bollard noted evidence that the recession was easing; but that the subsequent recovery was going to be slow and choppy. Looking into specific sectors, he said retail spending and residential housing had stabilized; but there was limited scope for a recovery in employment and investment. With an outlook for medium term inflation to remain within a reasonable range, there was little need to act on rates.

There were a few particular comments that struck a cord with traders though. The Governor said that he would be disappointed with further appreciation in the currency. This isn’t new as he has tried to jawbone and intervene for months and done so unsuccessfully for some time. More interesting was the suggestion that he doesn’t think further rate cuts would have much impact on the kiwi dollar a suggestion that he wouldn’t use policy to influence exchange rates. To offset this bullish notion, he went on to say that he expects to keep the benchmark lending rate unchanged until late into 2010. This seems to put a cap on the yield opportunities; but we have seen in the past that RBNZ is quick to change its stance and act on rates. Clearly, the market thinks his outlook somewhat unrealistic as Credit Suisse overnight index swaps are still pricing in nearly 100 basis points worth of hikes over the coming 12 months. Considering their habit for successful and large rate changes, this is still somewhat reserved and suggests they will not start until early or mid 2010.

Market Reaction
Volatility immediately picked up after the release; and the initial move was for a drop in the New Zealand dollar. Concerns over the appreciation of the nation’s currency and warnings that the benchmark rate can be held at its current level for another year or more is certainly bearish. However, comparing the sentiment following this event to previous rate decisions and Bollard commentary, this was relatively reserved if not a modest shift to the center. With signs that individual sectors of the economy are showing improvement, we are laying the ground work for a global recovery. Armed with the knowledge that the RBNZ can on a dime when it comes to interest rates, the kiwi would slowly appreciate after the event.

We have seen the markets surpass the heaviest flow of second quarter earnings and the first signs of economic activity for the industrialized world for the same period last week. With this round of influential data; we would expect the markets to be in sync and on pace for a clear trend. Instead, there has been a divergence in some of the underlying markets with some asset classes (currencies being the most palpable example) halted at the very extremes of their respective ranges and trends.

This week there is another round of notable event risk across the global market place; but it certainly does not carry the same bravado as the data fundamental traders are working with last week. Nonetheless, the most notable events include the US-China talks in Washington; the US consumer Confidence report; the RBNZ rate decision; straggling earnings reports; and, of course, the advanced reading of second quarter US GDP. The pinnacle of market moving influence comes with the growth report (the US stands in as a proxy for global activity when it comes to growth); but this is a long time for a market to consolidate on the edge of such a tense stall in sentiment. It would not be a surprise to risk appetite overwhelm fundamental considerations this week and take charge on producing either a breakout or reversal.

US-China Meeting in Washington
Though it is unlikely to come to much in the way of market moving price action, Chinese officials are meeting with US Treasury Secretary Timothy Geithner and other policy makers in Washington to discuss among other things the health of the US economy and its assets. The US dollar could be an interesting topic as China has swayed back and forth on its official position through supporting the currency (as the yuan is loosely pegged to the greenback and China holds the largest reserves of Treasuries in the world) and calling for its replacement as the world???s reserve with a basket in its stead. Geithner and company will no doubt right any proposals of diversification off; but they will certainly take concerns over the United States??? health and deficits seriously ??? they are the country???s largest investor. Politics aside, look for assurances against protectionist policy and the Chinese ???unwavering??? support of the United States??? assets and its investment interest.

US Consumer Confidence
The US was arguably the source of the global economic and financial collapse back in the summer of 2007. Therefore, it follows that the same economy will be expected to lead the world out of its recent gloom. There has been a very consistent turn in expectations surrounding growth and investment activity; but speculation requires a benchmark in the form of cold-hard data. Among the most timely of indicators happens to be the various sentiment surveys offered for the many economies and sectors. The Conference Board???s consumer optimism report lags its University of Michigan counterpart; but debates over accuracy often times provide the former with a market moving impact even though it comes across the wires second. Compare the changes in present conditions and expectations figures. Employment, income and spending components further make this indicator more valuable than its early-release cousin.

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Mortgage rates improved yesterday on news from the Federal Reserve Board chairman Ben Bernanke. Bernanke said “The FOMC anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period”.

Bond traders quickly bought up bargain priced Mortgage Backed Securities pushing mortgage rates down by 1/8th – 1/4%. Bond traders and pundits have commented recently that they would like to hear clear direction from the Fed concerning their policy on inflation concerns. Bernanke gave them some of what they wanted saying “it is important to assure the public and the markets that the extraordinary policy measures we have taken in response to the financial crisis and the recession can be withdrawn in a smooth and timely manner as needed, thereby avoiding the risk that policy stimulus could lead to a future rise in inflation”.

The Federal Reserve has committed billions of dollars to the purchase of mortgage backed securities in hopes of keeping long term interest rates low. Bernanke pointed at recent improvements in the credit market saying “Our purchases of agency mortgage-backed securities and other longer-term assets have helped lower conforming fixed mortgage rates. And better conditions in financial markets have been accompanied by some improvement in economic prospects. Consumer spending has been relatively stable so far this year, and the decline in housing activity appears to have moderated”.

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Money Market
Special Refinance Facility: Extension
A special refinance facility was introduced on November 1, 2008 under Section 17(3B) of the Reserve Bank of India Act, 1934 to provide funding to scheduled commercial banks (excluding regional rural banks) up to 1.0 per cent of their net demand and time liabilities (NDTL) as on October 24, 2008 at the repo rate. It is proposed:
- to extend this special refinance facility up to March 31, 2010.

Special Term Repo Facility: Extension
The Reserve Bank introduced a special 14-day term repo facility for banks in September 2008 through relaxation in the maintenance of SLR up to 1.5 per cent of their NDTL, to enable them to meet the liquidity requirements of mutual funds (MFs), non-banking financial companies (NBFCs) and housing finance companies (HFCs). The auctions for the special 14-day term repo are conducted on a daily basis. On a review, it is proposed:
- to extend the time for availability of this special term repo facility to banks up to March 31, 2010;
- to conduct these 14-day term repo auctions on a weekly basis.

Export Credit Refinance: Review
With a view to providing flexibility in the liquidity management of banks, the limit of the standing liquidity facility to banks in terms of export credit refinance (ECR) under Section 17(3A) of the RBI Act was raised from 15.0 per cent of the eligible outstanding rupee export credit as on the preceding fortnight to 50.0 per cent in November 2008. It is proposed:
- to review the ECR limit in March 2010.

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Bank of Canada Cuts Its Benchmark Rate To A Record Low, Bolsters Case For Zero
The Bank of Canada lowered its overnight cash rate for the fourth consecutive policy meeting, bringing the benchmark to 1.00 percent – its lowest level since the central bank was established back in 1934. However, the historical low is not the most significant outcome of this event. Rather, the possibility that the main rate in Canada reaches zero through fading projections for inflation and growth trend as well as noteworthy commentary has taken speculation beyond today’s largely discounted cut.

A Historic Cut
The 50 basis point cut in the benchmark lending rate today matched the consensus presented by economists and was largely discounted by market participants through the Canadian dollar and overnight swap rates. Looking at the fundamentals that supported this decision, it comes as little surprise that the central bank would pursue the expansionary policy they began at the end of 2007. Growth through the open of 2008 cooled 0.8 percent on an annualized basis – the sharpest contraction in 17 years. And, though readings in the subsequent quarters improved, key underlying indicators (such as retail sales, PMI business activity and employment) has steadily pulled the outlook for expansion down. Growth alone would not have allowed Governor Mark Carney and his fellow central bank members to have taken such an aggressive pace of rate cuts. With the global financial crisis seeping into the Canadian markets and inflation pulling back to target (2.0 percent), officials have taken the initiative to take a preventative stance towards policy to prevent a severe recession the likes of which the United States and United Kingdom are heading towards.

Projections Taking Canada Closer To ZIRP
Up until recently, the Bank of Canada’s dovish monetary policy has been precautionary as growth and inflation would have supported a neutral or even mildly hawkish stance. While policy officials have given some clue of their intentions, each rate decision would still come with sense of surprise from market participants. However, we can see that this sentiment has certainly shifted with even cautious economists fully pricing in a 50 basis point rate cut to record lows. From here, we would naturally have to expect that the BoC will be limited in its capabilities and approach as a benchmark at 1.00 percent doesn’t allow for much more easing in the traditional sense. Nonetheless, we can see that traders will be pricing in additional cuts and perhaps even a zero interest rate policy (ZIRP) before the global economy and rates turn.

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