Weekly Fin

WEEKLY INDICATORS OF FINANCIAL STRESS TRENDS AND DEVELOPMENTS • The TD Financial Stress Index (TDFSI) for the U.S. maintained its lowest level since February 2008, while the Canadian index improved by a further 4%. • Both short-term LIBOR-OIS spreads, as well as medium-term bank funding costs improved over the week, although the aggregate TDFSI remains about 17% above its 2008 average prior to the August flare-up. • In the U.S., ongoing substantial improvement in LIBOR-OIS, medium-term bank funding, and non-asset-backed commercial paper was offset to some degree by slight widening in ABCP and the tightness in short-term costs implied by the New York funding rate. 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

111

500

500 400

120

Last week:

125

Last year:

105

500

500

Last week: 112 400

This week:

400

400

Last year: 118 300

300

300

300

200

200

200

200

100

100

100

100

0 11/16/07

2/15/08

5/16/08

8/15/08

11/14/08

2/13/09

0 5/19/09

0 11/16/07

2/15/08

5/16/08

8/15/08

11/14/08

2/13/09

0 5/19/09

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 11/16/07

2/15/08

5/16/08

8/15/08

11/14/08

2/13/09

-150 5/19/09

*Positive denotes a loss

Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg. Last updated on: 5/19/2009 11:11

-15 11/16/07

2/15/08

5/16/08

8/15/08

11/14/08

2/13/09

-75 5/19/09

*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 11/16/07

2/15/08

5/16/08

8/15/08

11/14/08

2/13/09

0 5/19/09

400

400

300

300

200

200

100

100

0 11/16/07

2/15/08

PRESSURE ON U.S. LIBOR RATES

8/15/08

11/14/08

0 5/19/09

2/13/09

CANADIAN VARIABLE RATE MARGINS 1-MONTH PRIME-BA SPREAD

NY FUNDING RATE-LIBOR RATE SPREAD* Basis Points

5/16/08

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 11/16/07 2/15/08 5/16/08 8/15/08 11/14/08 2/13/09 5/19/09 *New York Funding Rate is an alternative to LIBOR first created in June 2008.

50 11/16/07

2/15/08

5/16/08

8/15/08

11/14/08

2/13/09

50 5/19/09

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 11/16/07

2/15/08

5/16/08

8/15/08

11/14/08

2/13/09

20 5/19/09

Spread likely needs to fall near 100bps to see relieved financial stress.

Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg. Last updated on: 5/19/2009 11:11

US$ Billion

1,100 1,000 900 800 700 600 500 400 300 200 100 0 -100 -200 -300 -400 -500 11/9/07

2/8/08

5/9/08

8/8/08

11/7/08

2/6/09

1,100 1,000 900 800 700 600 500 400 300 200 100 0 -100 -200 -300 -400 -500 5/8/09

*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 11/16/07 2/15/08 5/16/08 8/15/08 11/14/08 2/13/09 5/19/09 Need to see levels back below 200bps to see relieved stress and closer to 100bps to see signficant funding.

200,000

2/15/08

5/16/08

8/15/08

11/14/08

0 5/15/09

2/13/09

*Total for 28-, 35-, and 84-day auctions; A value greater than one implies there was more demand for funds than was supplied.

NEW ISSUANCE BY MATURITY

CANADIAN AUCTIONS

U.S. COMMERCIAL PAPER ISSUANCE

BANK OF CANADA TERM PURCHASE AND RESALE AGREEMENTS (PRA)

US$ Billion

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 11/16/07 2/15/08 5/16/08 8/15/08 11/14/08 2/13/09 5/15/09 Spikes in 1-4 day issuance reflect inability or lack of safety to fund at longer maturities.

500

4 11/16/07

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 11/20/07

2/19/08

5/20/08

8/19/08

11/18/08

2/17/09

0 5/19/09

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

200 100

300

C$ Million

US$ Billion U.S. Non-TAF Credits (rhs)

800

500 450

1,000

200 100

0

1,200

400

400

Canada Special Purchase Agreement (lhs)

350 300

0

-100

-100

-200

-200

-300

-300

-400

-400

-500

-500

-600 11/16/07

2/15/08

5/16/08

8/15/08

11/14/08

2/13/09

-600 5/15/09

*Change over 24 months prior

Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg. Last updated on: 5/19/2009 11:11

250

600

200 400

150 100

200

50 0 11/16/07 2/15/08 5/16/08 8/15/08 11/14/08 2/13/09 Other provisions of credit by the central banks outside of the above auctions.

0 5/15/09

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 11/16/07

2/15/08

5/16/08

0.75

Euros per C$

1.0

0.65

0.9

0.60

0.8

US Dollar (rhs)

11/14/08

2/13/09

80 5/19/09

*Higher values denote U.S. dollar strength

Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg. Last updated on: 5/19/2009 11:11

1.1

0.70

Trade-weighted (lhs) 8/15/08

C$ per US$

0.55 11/16/07

2/15/08

5/16/08

8/15/08

Euro (lhs) 11/14/08

2/13/09

0.7 5/19/09

*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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