Weekly Focus
0
0
Money, money, money
Fri, Oct 3 2008, 14:53 GMT
by Danske Research Team
A key issue in the financial crisis at the moment is the tensions in the money markets. This is evident in the sharp rise in money market rates seen in recent weeks around the world - not least in the US.
The trigger for the renewed tensions was the bank-ruptcy of Lehman Brothers on 14 September. This had several implications. First, perceived counterparty risk went up as fears of other bankruptcies swept through the system. Banks therefore became even more reluc-tant to lend money to other banks. Second, the collapse of Lehman Brothers led to big losses for the oldest US money market fund, Reserve Primary MMF, which "broke the buck". This means that investors experi-enced real losses on funds invested in the Reserve Primary MMF, as net asset value went below USD1. This was the first time since 1994 that a money mar-ket fund had broken the buck. The incident led to a flight of money out of money market funds in the US.
Money market funds are a crucial provider of liquidity to financial institutions through their purchase of Commercial Paper (CP) from financial institutions. CPs are obligations of short maturity used to raise liquidity by companies. However, the flight from money market funds reduced the capital in these for purchasing CPs, and at the same time it made the funds much more conservative, shifting their demand for assets from CPs to safe US T-bills. The shift is apparent in the out-standing volume of US CPs to financials, which has come down rapidly in recent weeks (see middle chart). Financial institutions are therefore finding it much harder to raise liquidity in the CP market. These ten-sions could lead to a negative spiral, as counterparty risk goes up even further when liquidity scarcer.
Published on Fri, Oct 3 2008, 15:45 GMT
Archive
- Uncertainty ahead of Flex auctions
Published On Fri, Nov 28 2008, 15:13 GMT - Time for another rescue package
Published On Fri, Nov 21 2008, 15:42 GMT - Historical decline in bond yields
Published On Fri, Nov 14 2008, 15:49 GMT - US presidential election
Published On Fri, Oct 31 2008, 15:57 GMT - Denmark's central bank hikes again
Published On Fri, Oct 24 2008, 15:51 GMT
Danske Bank
| Holmens Kanal 2-12, DK-1092 Copenhagen
http://www.danskebank.com/ | danskeresearch@danskebank.com
Legal disclaimer and risk disclosure
This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.Interested in forex trading? forex brokerage firms!
FXstreet.com will give you a 3 months membership as soon as minimum rebates have been generated (€150 for private trader/ €300 for corporate trader)
[Read Premium full description]
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.
Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management. FXstreet.com has not verified the accuracy or basis-in-fact of any claim or statement made by any independent author: errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website, by FXstreet.com, its employees, partners or contributors, is provided as general market commentary and does not constitute investment advice. FXstreet.com will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
©2008 "FXstreet.com. The Forex Market" All Rights Reserved.