It has been a wild time in the financial markets!
Previous posts on this subject:
11/10 – Interest Rates (letter to members)
10/10 – Interest Rates (letter to members)
09/30 – Financial Markets, Part 1 and Part 2
09/08 – Fannie and Freddie, Part 1 and Part 2
In brief the Federal government placed Fannie Mae and Freddie Mac into conservatorship on September 7. Lehman Brothers filed for bankruptcy on September 15. Interest rates went crazy.
Much has been written recently about the stock market. My last comment was on 9/30 at which time the DJIA was down 27% from its all-time high of last year. It is now down 37%. That is now worse than the downturn of 2002 (down 31%). But still a ways to go to equal the crash of 1973-74 (down 45%) or the Great Depression (down 89%).
Less has been written about the credit markets, but the credit markets are important to Yankee. Interest rates have been behaving strangely since the subprime crisis started in August 2007. At first the strange behavior was favorable to the Farm Credit System, but since the end of April 2008 interest rates have been adverse to the System.
As a result many System institutions (but not Yankee) were in the process of increasing rates to members even before the fallout from Fannie, Freddie and Lehman Brothers was apparent.
Why have interest rates gone crazy since the Fannie, Freddie and Lehman Brothers events? Investors lost a lot of money on preferred stock in Fannie and Freddie and on Lehman Brothers debt. Investors became less willing to lend money to anyone except the U.S. government (and even then they preferred short term debt over long term debt). In particular, financial institutions became less willing to lend money to each other. As a result interest rates, other than rates on U.S. Treasury debt, have increased significantly.
One way to talk about this is to examine the spread between the 3-month rate for U.S. Treasury debt and the 3-month LIBOR rate. This is sometimes called the TED spread. LIBOR is the interest rate at which banks are willing to lend to each other, and this spread is an indication of the amount of unease in the financial markets.
For the 5 year period ending July 2007 the TED spread averaged 28 bp (bp=basis point, 1 bp=0.01%). For the 12 month period beginning August 2007 the TED spread increased to 125 bp. For the month of October 2008 the TED spread averaged 334 bp!
There is a lot of unease in the financial markets.
This post is part 1 of 2. Click here for part 2.