WEEKLY INDICATORS OF FINANCIAL STRESS TRENDS AND DEVELOPMENTS • The TD Financial Stress Indices (TDFSI) were little changed, with a minor deterioration in the U.S. and minor improvement in Canada. • Short-term spreads (LIBOR-OIS) continue to narrow while long-run borrowing costs continue to trend lower, as well. • Demand for credit from the Federal Reserve has also receeded recently, with the most recent TAF auction for 84-day credit (the longest term offered by the Fed) having had the least private sector demand since December (as a share of available financing), in spite of the available amount of financing being the least on offer so far this year, as well. Richard Kelly, Senior Economist 416-982-2559
Beata Caranci, Director of Economic Forecasting 416-982-8067
SUMMARY LIQUIDITY AND FINANCIAL STRESS INDICATORS
600
U.S. FINANCIAL STRESS
CANADIAN FINANCIAL STRESS
TD ECONOMICS U.S. FINANCIAL STRESS INDEX (TDFSI)
TD ECONOMICS CANADIAN FINANCIAL STRESS INDEX (TDFSI)
Index
600
This week:
600
Basis Points
600
139
500
500 400
133
Last week:
135
Last year:
116
500
500
Last week: 135 400
This week:
400
400
Last year: 146 300
300
300
300
200
200
200
200
100
100
100
100
0 11/2/07
2/1/08
5/2/08
8/1/08
10/31/08
1/30/09
0 5/4/09
0 11/2/07
2/1/08
5/2/08
8/1/08
10/31/08
1/30/09
0 5/4/09
Canada TDFSI is weighted average of four financial series. Index value of 100 denotes the peak stress level during the 2000-2002 period.
US TDFSI is weighted average of seven financial series. Index value of 100 denotes the peak stress level during the 2000-2002 period.
U.S. STOCKS AND CREDIT TIGHTNESS
CANADIAN STOCKS AND CREDIT TIGHTNESS
AVERAGE WEEKLY S&P500 LOSSES AND CHANGE IN U.S. TD FINANCIAL STRESS INDEX
AVERAGE WEEKLY TSX LOSSES AND CHANGE IN CANADIAN TD FINANCIAL STRESS INDEX
20
% loss*
Change in index
15
Change in US index (rhs)
10
Loss in S&P 500 (lhs)
200 150
20
% loss*
Change in index Change in Canada index (rhs)
15
100 75
Loss in TSX (lhs) 10
50
50
5
25
0
0
0
100
5 0 -5
-50
-5
-25
-10
-100
-10
-50
-15 11/2/07
2/1/08
5/2/08
8/1/08
10/31/08
1/30/09
-150 5/4/09
*Positive denotes a loss
Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg. Last updated on: 5/4/2009 11:13
-15 11/2/07
2/1/08
5/2/08
8/1/08
10/31/08
1/30/09
-75 5/4/09
*Positive denotes a loss
TD ECONOMICS
WEEKLY INDICATORS OF FINANCIAL STRESS BANK FUNDING LIQUIDITY
400
SHORT-TERM
MEDIUM-TERM
3-MONTH LIBOR-OIS SPREADS
5-YEAR BANK BOND-GOVT BOND SPREAD
Basis Points
400
US
200
200
100
100
0 11/2/07
2/1/08
5/2/08
8/1/08
10/31/08
0 5/4/09
1/30/09
400
400
300
300
200
200
100
100
0 11/2/07
2/1/08
PRESSURE ON U.S. LIBOR RATES
8/1/08
10/31/08
0 5/4/09
1/30/09
CANADIAN VARIABLE RATE MARGINS 1-MONTH PRIME-BA SPREAD
NY FUNDING RATE-LIBOR RATE SPREAD* Basis Points
5/2/08
Spreads likely need to fall below 200bps in the U.S. and 150bps in Canada before seeing a return of significant medium-term financing.
Spreads likely need to fall below 150bps in th U.S. and 100bps in Canada and Europe to see relieved financial stress.
60
500
Canada (AA-rated)
300
UK/Eurozone (avg)
600
US (A-rated)
500
Canada
300
Basis Points
600
60
250
Basis Points
250
50
50
1-month 40
40
200
200
150
150
100
100
3-month 30
30
20
20
10
10
0
0
-10 -10 11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09 *New York Funding Rate is an alternative to LIBOR first created in June 2008.
50 11/2/07
2/1/08
5/2/08
8/1/08
10/31/08
50 5/4/09
1/30/09
Need to see a return to the long-run average of at least 160bps to ensure adequate margins.
MARKET LIQUIDITY
FUNDING NEEDS
COST OF HEDGING INTEREST RATE RISK
U.S. COMMERCIAL BANK BORROWING NEEDS
2-YEAR U.S. DOLLAR SWAP SPREAD 160
Basis Points
GAP BETWEEN COMMERCIAL BANK ASSETS AND DEPOSITS* 160
140
140
120
120
100
100
80
80
60
60
40
40
20 11/2/07
2/1/08
5/2/08
8/1/08
10/31/08
1/30/09
20 5/4/09
Spread likely needs to fall near 100bps to see relieved financial stress.
Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg. Last updated on: 5/4/2009 11:13
US$ Billion
1,100 1,000 900 800 700 600 500 400 300 200 100 0 -100 -200 -300 -400 -500 10/26/07
1/25/08
4/25/08
7/25/08
10/24/08
1/23/09
1,100 1,000 900 800 700 600 500 400 300 200 100 0 -100 -200 -300 -400 -500 4/24/09
*Three month change; Note data is available with a one week lag
TD ECONOMICS
WEEKLY INDICATORS OF FINANCIAL STRESS U.S. COMMERCIAL PAPER
CENTRAL BANK LIQUIDITY
INTEREST RATES
U.S. AUCTIONS
3-MONTH COMMERCIAL PAPER-TBILL SPREAD 500
FEDERAL RESERVE TERM AUCTION FACILITY (TAF)* 0
Basis Points
Ratio**
500
US$ Billion 160 Amount (rhs)
Asset-backed Not asset-backed
140
Bid-Cover Ratio (lhs inverted)
400
400
300
300
1
120 100
2 200
80 60
200
40
3 100
100 20
0 0 11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09 Need to see levels back below 200bps to see relieved stress and closer to 100bps to see signficant funding.
5/2/08
8/1/08
10/31/08
0 5/1/09
1/30/09
*Total for 28-, 35-, and 84-day auctions; A value greater than one implies there was more demand for funds than was supplied.
CANADIAN AUCTIONS
U.S. COMMERCIAL PAPER ISSUANCE
BANK OF CANADA TERM PURCHASE AND RESALE AGREEMENTS (PRA) 200,000
1-4 Days
14,000
C$ Billion
14,000
>4 Days
150,000
150,000
100,000
100,000
50,000
50,000
0 0 11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/1/09 Spikes in 1-4 day issuance reflect inability or lack of safety to fund at longer maturities.
500
2/1/08
NEW ISSUANCE BY MATURITY
US$ Billion
200,000
4 11/2/07
12,000
12,000
10,000
10,000
8,000
8,000
6,000
6,000
4,000
4,000
2,000
2,000
0 11/5/07
2/4/08
5/5/08
8/4/08
11/3/08
2/2/09
0 5/4/09
CUMULATIVE CHANGE BY TYPE
DISCOUNT WINDOWS AND OTHER LIQUIDITY
U.S. COMMERCIAL PAPER OUTSTANDING*
OTHER SHORT-TERM CENTRAL BANK LENDING*
US$ Billion
500
Asset-Backed Financial
400 300
Non-Financial
300
200
200
100
100 0
0 -100
-100
-200
-200
-300
-300
-400
-400
-500 11/2/07
2/1/08
5/2/08
8/1/08
10/31/08
1/30/09
1,200
-500 5/1/09
*Change over 24 months prior
Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg. Last updated on: 5/4/2009 11:13
C$ Million
US$ Billion U.S. Non-TAF Credits (rhs)
400
450
1,000 800
500
400
Canada Special Purchase Agreement (lhs)
350 300 250
600
200 400
150 100
200
50 0 11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 Other provisions of credit by the central banks outside of the above auctions.
0 5/1/09
TD ECONOMICS
WEEKLY INDICATORS OF FINANCIAL STRESS CURRENCY MOVES
115
U.S. DOLLAR EXCHANGE RATE
CANADIAN DOLLAR EXCHANGE RATE
U.S. DOLLAR EXCHANGE RATE*
CANADIAN DOLLAR EXCHANGE RATE
Index
Yen per US$
140
110
130
105
120
100
110
95
100
90
90
Yen (rhs) 85 11/2/07
2/1/08
5/2/08
0.75
Euros per C$
1.0
0.65
0.9
0.60
0.8
US Dollar (rhs)
10/31/08
1/30/09
80 5/4/09
*Higher values denote U.S. dollar strength
Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg. Last updated on: 5/4/2009 11:13
1.1
0.70
Trade-weighted (lhs) 8/1/08
C$ per US$
0.55 11/2/07
2/1/08
5/2/08
8/1/08
Euro (lhs) 10/31/08
1/30/09
0.7 5/4/09
*Higher values denote Canadian dollar strength
TD ECONOMICS
WEEKLY INDICATORS OF FINANCIAL STRESS GLOSSARY LIBOR-OIS SPREAD: This spread is a measure of the funding costs between banks. LIBOR (London Inter-Bank Offer Rate) is the posted interest rate at which banks borrow from each other, typically at short-term maturities of as little as one day. Inter-bank borrowing is aimed at managing cash levels (as opposed to borrowing to fund expansion which tends to be done with long-term financing). Therefore, this rate is a reflection of liquidity stresses, or the inability or unwillingness to lend cash to others at a very short term nature. LIBOR is also the benchmark interest rate for a number of derivatives and other financial products, so it has a direct implication on borrowing costs in general. OIS (Overnight Indexed Swap) is the interest rate for a derivative which trades only the risk that interest rates might change in the near term. As such, this interest rate tends to stay relatively close to the actual level of the interest rate set by the central bank. Taking the difference between LIBOR and OIS is the premium the market is currently pricing for the risk of default (which is small in short-term loans) and the heightened premium placed on having cash (liquidity risk). 5-YR BANK BOND-GOVT BOND SPREAD: Bank bonds must offer a high enough yield in order to attract investors. Generally, the higher the yield, the higher the perceived risk, and therefore, the higher the yield demanded by investors to buy the debt. Since the government is seen as having much less default risk and much less liquidity risk than any given firm, government debt is taken as a proxy for the cost of "risk-free" borrowing. By taking the spread between the two, we have a measure of the extra costs by banks to raise longer-term funding. When these costs are high, firms tend to move into shorter-term financing which reduces the immediate costs, but also increases the need to seek new financing sooner when this debt matures (rollover risk). This extra demand for shorter maturity debt can also further pressure short-term interest rates like LIBOR. NEW YORK FUNDING RATE-LIBOR SPREAD: The New York Funding Rate (NYFR) is an alternative to LIBOR created in June 2008. Rather than being market determined, each rate is established as the average of a survey of banks each morning. In the case of LIBOR, the question is the rate at which your own bank would be able to borrow from another bank. There has been concern in the current environment that participating banks were intentionally given ow estimates due to the fear of being stigmatized. The NYFR asks for a generic response of what a similar rating institution would likely borrow at. A higher spread of the NYFR over LIBOR then could indicate increased stress in interbank lending. 1-MONTH PRIME-BANKERS ACCEPTANCE SPREAD: This is a measure important for Canadian financial institutions. Bankers acceptances are the short-term debt generally used to finance ongoing lending of Canadian banks, while the prime rate is the benchmark for variable interest loans offered to consumers and businesses. A narrowing spread means that the costs of funds for the banks has not changed to the same degree as changes to the prime rate. Since this margin has to compensate for the losses banks will ultimately sustain as some borrowers become delinquent or default on their loans, as well as the costs associated with making these loans, a narrowing spread has important implications for banks' ability to make future loans. A sustained narrowing can lead to the need to limit potential defaults by making safer loans. U.S. DOLLAR SWAP SPREAD: Interest rate swaps are a derivative product which allows two parties to "swap" their interest rate exposure. One party typically agrees to pay a fixed interest rate to the other party over time, while the other party agrees to pay a floating interest rate, typically LIBOR, to the other. Firms use it to reduce the risk of interest payments paid on their corporate debt or reduce the mismatch in exposure to interest rate changes between their assets and liabilities, especially for those firms involved in areas such as the mortgage market where interest rate risk is most acute. This is an important indicator of financial stress due to its relatonship with LIBOR, as well as the fact the spread between the swap rate and the Treasury rate of the same maturity is a good reflection of the liquidty of Treasuries in the market. COMMERCIAL BANK ASSET-DEPOSIT GAP: Every Friday, the Federal Reserve publishes a consolidated balance sheet of all U.S. commercial banks. Commercial bank assets include all the loans banks extend and securities they buy. To finance these outlays, banks can rely on the deposits they hold or must try to borrow money externally. By taking the difference of total assets and deposits, then, we get a measure of the pressures on banks to finance their operations through borrowing.
Source: Bloomberg and TD Economics
TD ECONOMICS
WEEKLY INDICATORS OF FINANCIAL STRESS GLOSSARY 3-MONTH COMMERCIAL PAPER-TREASURY BILL SPREAD: Commercial paper is short-term debt issued by financial as well as nonfinancial firms. It has a maturity of less than 270 days and typically less than 30 days. It is generally used to finance operations that fall in between the day-to-day liquidity needs addressed by LIBOR or the longer term operations financed in long-term debt markets. As with the bond spreads above, the government Treasury bills are seen as "risk-free" equivalents so the spread gives a measure of the extra risk seen in the debt of private companies. It is typically held by many mutual funds so the spread is a reflection of costs of financing for firms, as well as stresses in the mutual fund industry. COMMERCIAL PAPER ISSUANCE: While the interest rate measures the cost of this borrowing, this measure tracks the amount of short-term debt being issued by firms. Sudden increases in issuance imply a greater need for short-term financing. Spikes at the shortest of maturities also implies increased uncertainty by investors over the prospects for the firm or economy. This increases the frequency of having to borrow new debt, and since it tends to come at times when interest rates have increased, means the total debt costs have risen as well. COMMERCIAL PAPER OUTSTANDING: Measures the cumulative change in commercial paper by type over the last 24 months. This can be a reflection of an inability to find buyers for this form of financing as well as ongoing deleveraging. TERM AUCTION FACILITY: The TAF was a liquidity facility introduced by the Federal Reserve in December 2007. Deposit-taking financial institutions participate in an auction with the winners paying an interest rate determined in the auction in return for receiving cash for the specificed period (28-day and 84-day auctions are currently available). To guarantee repayment, the financial institution must also put up financial instruments of equal value in collateral, in effect allowing banks to swap a less liquid asset for something more liquid. The bid-cover ratio is a measure of demand for these funds, dividing the total amount demanded by the total amount supplied. As such, a value of one means demand matches supply, while a value greater than one implies there was more demand from banks for these funds than were provided by the central bank. TERM PURCHASE AND RESALE AGREEMENT: The TAF is the liquidity facility provided by the Bank of Canada for Canadian commercial banks similar to the TAF details above.
A select number of these indicators are available from TD Economics on a daily basis from:
http://www.td.com/economics/comment/daily_fin.pdf
Bloomberg Tickers US LIBOR:
US0003M Index
US OIS:
USSOC Curncy
US Tbill:
USGG3M Index
Canada LIBOR:
CD4803M Index
Canada OIS:
CDSOC Curncy
NY Funding Rate:
NYFR1M Curncy USSP2 Curncy
UK LIBOR:
BP0003M Index
UK OIS:
BPSOC Curncy
2-yr Swap Spread:
Euro LIBOR:
EU0003M Index
Euro OIS:
EUSOC Curncy
US A1+ ABCP:
ACPA090Y Index
US 5-yr Bank Debt:
C0705Y Index
US 5-yr Treasury
USGG5YR Index
US A1/P1/F1 CP:
DCPB090D Index
Canada 5-yr Bank Debt:
C3065Y Index
Canada 5-yr Govt
GCAN5YR Index
BoC Term PRAs:
BCMOTREP Curncy
Canada Prime Rate
PRIMCAN Index
Canada BA
CDOR01 Curncy
Bloomberg tickers not available US Commercial Bank Assets and Deposits, US CP Issues, US CP Outstanding, TAF Auctions,
Source: Bloomberg and TD Economics
TD ECONOMICS
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