Saturday, March 13, 2010

No Risk and High Reward...or so it seems!

Money printing by Federal authorities, or more precisely the Federal Reserve, distorts market incentives by way of pricing. Consider the following two items reported this week in the Financial Times:

The spread on the 30-year Fannie Mae current coupon bond - a benchmark for the sector - this week fell to 57 basis points over US Treasuries, the lowest ever, according to Mahesh Swaminathan, mortgage strategist at Credit Suisse.

Since a year ago, 204 stocks in the S&P 500 index are up 100 per cent or more, 33 are 300 per cent higher or more and two are up 1,000 per cent or more, according to Capital IQ.

[see here and here for the complete articles where these quotes come from.]

These two measures indicate risk has retrenched and happy days are here again. Yet in light of the tremendous risks that still lurk out there, there is very little that would warrant the level of decrease in the aforementioned variables. Spreads have narrowed as a result of the FED purchasing $1.2 trillion worth of Agency debt and stocks expanded as a result of massive government intervention (see previous post).

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