SP 500 Bear Market Update: Daily Charts: March 11

We have been posting SP 500 bear market update charts, in which we compare the current 2007-8 bear market with the last bear market and recession which we had in 2000-2002. We have been doing this on the weekly charts.

The problem with the weekly line chart is that it really doesn't catch the intra-week volatility one sees in bear markets, with steep declines and snapback short covering rallies. The advantage of course is that it is easier to see the matching and the 'big picture' of the market moves.

Since intra-week volatility hit a five year record in the Dow moonshot today, we thought it would be useful to show a DAILY chart which compares the same two bear markets in the same way, with time and price percentage roughly mapped to the same values. It just shows the fluctuations with much greater detail than the weekly charts.

Here it is:

US Treasury Debt 'Riskier' Than the German Bund For 'the First Time Ever'

U.S. Treasuries Riskier Than German Debt, Default Swaps Show
By Abigail Moses

March 11 (Bloomberg) -- The risk of losses on U.S. Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves, credit-default swaps prices show.

Contracts on 10-year Treasuries traded at a record 16 basis points earlier today, compared with 15 basis points on German government notes, according to data compiled by BNP Paribas SA. In July, U.S. credit-default swaps were at 1.6 basis points, compared with 2.5 basis points on bunds.

Federal Reserve Chairman Ben S. Bernanke announced plans today to lend as much as $200 billion of Treasury notes in exchange for debt including private mortgage-backed bonds to avert an exodus from the securities that threatens to deepen the housing slump and economic slowdown.

``The U.S. government is not immune from the consequences of the credit crisis,'' said Fabrizio Capanna, BNP's head of high-grade corporate trading in London. ``Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.''

The Fed is trying to ease investor concern that a decline in house valuations and record foreclosures will add to losses for companies including Freddie Mac and Fannie Mae, the two biggest providers of U.S. mortgages. The $4.5 trillion of agency mortgage securities is about the same size as the market for Treasury notes.

Credit-default swaps are used to speculate on the ability of companies or governments to repay their debt and offer a benchmark for pricing securities. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A decline indicates improvement in the perception of credit quality; an increase, the opposite.

Hoarding Treasuries

A basis point on a credit-default swap contract protecting $10 million of debt from default for 10 years is equivalent to $1,000 a year.

Investors and securities firms have hoarded Treasuries during the credit crisis because they are considered the safest and most easily traded securities, reducing yields on two-year notes to the lowest since 2003. Yields on Treasuries have been lower than on German bunds since October.

U.S. yields rose today by the most since May 2004 to 1.77 percent from 1.5 percent on Bernanke's plan.

To contact the reporter on this story: Abigail Moses in London Amoses5@bloomberg.net

Last Updated: March 11, 2008 13:47 EDT

Fed Man Says: STOP!

Bank Stocks Rally on Fed Move
Tuesday March 11, 11:23 am ET
By Dan Seymour, AP Business Writer

Bank Stocks Rally As Fed Offers to Swap Super-Safe Treasury Bonds for Mortgage Debt

NEW YORK (AP) -- Bank stocks spiked Tuesday after the Federal Reserve offered to swap $200 billion of ultra-safe Treasury bonds for some of the troubled investments roiling Wall Street.

The offer is designed to make it easier for banks to raise cash. By temporarily trading no-risk Treasurys for mortgage bonds that have become toxic on Wall Street, the Fed is giving banks collateral they can use to borrow money.

Over the last few months, lenders have developed a distaste for risk and uncertainty, and numerous markets where banks typically raise cash have frozen up. It is easy to borrow money using Treasury debt as collateral because the U.S. government is considered the most creditworthy borrower in the world.

"It takes a lot of the pressure off the short-term funding side of the major brokers," said Sanford Bernstein analyst Brad Hintz, who used to be chief financial officer of Lehman Brothers Holdings Inc. "What the Fed is doing is attempting to break the back of uncertainty in the repo market and ensure that no major financial institution goes down."

Hintz said a bank failure today would be far more problematic than it would have been 20 years ago. Through a complex series of contracts and swaps, Wall Street has created a nexus of interconnected risk, he said. The Fed needs to ensure no banks go bankrupt because they are so dependent on one another, he said.

Shares of investment banks, which were clobbered by a seizure in certain corners of the bond market Monday, recovered much of their value Tuesday.

Lehman Brothers climbed almost 7 percent, while Morgan Stanley, Goldman Sachs Group Inc., JPMorgan Chase & Co., Merrill Lynch & Co., and Citigroup Inc. all spiked more than 4 percent.

The Philadelphia Stock Exchange KBW Bank Index, which tracks 24 banks and lenders, surged nearly 5 percent. The dollar jumped, and "safe havens" such as gold and Treasury bonds, which investors have been flocking to in order to shelter their investments from the credit crisis, posted declines that have been rare in 2008.

Douglas Peta, market strategist at J. & W. Seligman & Co., said he is not convinced the money banks borrow will be put to good use.

Banks are struggling, and Peta said rather than lending the capital they raise the companies may use it to bolster their own balance sheets. This is good for the companies themselves, he said, but would not help financial markets.

"That's the equivalent of taking money and stuffing it under the mattress," he said. "What we're looking for is money to be lent."

The Fed has tried to stem the sell-off of a range of debt, particularly home loans, by cutting interest rates.

This approach has not worked, said LibertyView Capital Management President Rick Meckler, because companies that are borrowing at lower interest rates are still not using it to buy risky investments.

Despite lower interest rates, many lenders are still under pressure to dump their investments to buttress their finances or repay their own lenders. This selling has yanked down prices for many kinds of investments, he said, which in turn forced more selling.

Meckler said by coming up with more creative ways to inject liquidity into financial markets, the Fed will hopefully relieve some of the pressure on lenders to sell their assets.

"You were really in a vicious cycle," he said. "This is an attempt to break that cycle."