The nastiest part of the subprime crisis, which has prompted banks to tighten credit and led the U.S. Federal Reserve (Fed) to come to the rescue of Bear Stearns, could be history if we rely on what the short-term borrowing rates is showing us.
The difference between the yield of treasury bills of three months and the rate of loans denominated in U.S. dollars in London, an indication of credit risk, has narrowed by 7 basis points to 0.93 basis points, the smallest gap since February 25 last. This gap had risen to 2 percentage points on March 19.
"It indicates that at the very least, the worst is past," said Theodore Ake, head of trading in treasury bills at Mizuho Securities USA in New York, one of 20 brokers doing business in the primary market and trading directly with the Fed.
"There was a lot of panic integrated into these transactions, and it will continue to unwind, he adds. There has been a massive movement towards quality "
Ben S. Bernanke, Fed chairman, supports confidence in the credit markets after cutting interest rates seven times since last September, supported the takeover of Bear Stearns and injected over 900 billions US in the financial system.
These measures have helped to ease disruptions while there was loss and impairment losses related to mortgage-backed securities and loans disclosed by banks to the tune of 329 billion U.S. dollars.
Mr. Bernanke has reduced the target rate loans a day between banks by 3.25 percentage points since last September, including two cuts by three quarters of a point this year.
The Central bank has provided U.S. $ 29 billion of funding to ensure that JP Morgan Chase buys Bear Stearns. Loans were also offered to brokerage houses as part of the largest credit expansion since the Great Depression.
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