Are we witnessing the end of the crisis?
Over at the WSJ’s Marketbeat blog, David Gaffen reports that the VIX – the Chicago Board Options Volatility Index – was on Wednesday down at its lowest point since October last year:
The Chicago Board Options Exchange Volatility Index, known as the VIX, is a broad-based measure of investor anxiety. As it rises, it suggests investors are more worried about markets. When it falls, it suggests greater comfort with risk-taking.
Although Felix Salmon at Market Movers points out the occasional fallibility of using volatility as a proxy for risk, it’s pretty clear from other measures that “risk” is, indeed, falling.
The TED spread (The premium on 3-month Libor over 3-month T-bills) is, similarly down to pre-crisis levels:
Alea too notes from the Bank of England’s latest stability report that premiums on credit default swaps are down across the board.
Indeed, the latest series of the iTraxx sub financials (5-year) – which was constituted a few days after the Bear Stearns collapse indicates that the market was normalising. As of yesterday, at 98bps, the sub-index was trading nearly 140bps tighter from its March high of 237.
Turning then to the Fed’s TSLF facility – a broad, if opaque, litmus test of banks’ own internal perceptions of risk – and the relaxing tendency is even clearer: with $25bn on offer on Thursday, bids for just $7.2bn were submitted.
All this is perhaps inevitable. There may have well been fears of a second Bear event, but those are unlikely to be born out. In spite of their credibility shortcomings, the rating agencies have it right when they say – as they did earlier this week – that, tentatively, around three quarters of expected writedowns have now been made.
Add to that technical factors, such as the introduction of a new, more nuanced series to the ABX and the increased tendency (if not requirement) to “mark to level three” and banks’ valuation models will soon start to churn out less hysteric pricing for Aaa instruments.
The worm has begun to turn.
But it would be premature to declare the crisis over. Mervyn King put it best on Wednesday: “the nice decade is behind us.”
If trouble at investment banks is over – in the broader financial world, it isn’t. As the FT on Friday reported, UK mortgage lenders are eyeing up to £90bn of MBS for use in the Bank of England’s “special liquidity scheme” – to be swapped for gilts.
And despite undersubscription to the TSLF, the Fed’s direct loans of cash to commercial banks through the discount window rose to their highest ever level.
While investment banks have suffered their losses, commercial banks seem only on the cusp of reporting theirs. For them, a slow burn of declining spending, tighter margins and sharp increases in default rates.
Other – more vanilla – asset classes have yet to find accurate pricings too: Alt-A, credit card securities auto-loans and CMBS are all securities on negative watch: a broad recession, even if not deep, will surely have a bigger impact on consumer-linked debt securities than has yet been anticipated.