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As this goes down, the value of AIG (and probably Lehman) goes up.

IG On-the-Run Spreads (Sep 22)


IG6 Spreads (Sep 22)


IG7 Spreads (Sep 22)


IG8 Spreads (Sep 22)


IG9 Spreads (Sep 22)


6 Responses

  1. From Merrill Economist:

    Deficits in fiscal years 2009 and 2010 will be much higher. Prior to the TARP we had been anticipating budget deficits of $500 and $525 billion for fiscal years 2009 and 2010, respectively. Assuming some front-loading of spending occurs during this process (but not including potential add-ons for other mortgage relief programs), the deficit for 2009 is expected to be $900 billion while the deficit in 2010 should be $825 billion.

  2. Yes I know, picked that up from one of your earlier posts. Hopefully they will have the foresight to attach some form of fiscal stimulus to the TARP bill. Depending on the pricing mechanism they choose the teasury may not use that much of the $700 billion.

  3. Even if mbs are exchanged for tsy secs 1 for 1, the cash flow being redirected to the treasury by this plan could reduce aggregate demand.

    Currently the private sector has $700 billion in MBS which ‘pay’ some 8% which will be replaced by $700 billion of tsy secs which pay 4%. (I’m guessing here)

    The reduction in private sector cash flow would be some $28 billion/yr redirected to the treasury.

    Of course this deflationary effect would be magnified if government ‘under’ pays for the assets.

  4. agreed- the asset exchange works against agg demand as you suggest, if the tsy doesn’t ‘overpay’ for what it buys, etc. which would bring it’s actual yield down

  5. An additional deflationary blow would be created by the government ‘allowing’ homeowners that can barely afford their mortgage to stay in their homes with adjusted terms.

    Instead of going through bankruptcy and moving into a rental unit at half the cost, government sponsored homeowners with renegotiated mortgages, will be paying as much as economically possible into the treasury.

    Also as we’ve discussed before, banks are currently allowing many homeowners to live rent free! This ‘financial sector directed stimulus’ is currently creating growth in the future federal deficit that Paulson will eventually take on at the treasury. Once Paulson’s plan is implemented, the ‘financial sector directed stimulus’ will likely be reduced as the government forecloses or renegotiates with delinquent homeowners.

    It looks to me that unless the government overpays, we will need more deficit spending. Preferably that deficit spending would come from ‘government directed stimulus’. What’s sad is both Obama and McCain think this ‘financial sector directed stimulus’ won’t allow them to spend, perhaps they are right.

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