Offshore investment continues

SYDNEY, Sept 5 (Reuters) - Queensland Treasury Corporation (QTC) has launched NZ$375 million ($264 million) in 10-year Kauri bonds, its first such issue.

The bond has a maturity of Sept. 18, 2017 and carries a coupon rate of 7.125 percent a year. It was priced to yield 7.18 percent, 97 basis points over the benchmark 2017 New Zealand government bond and 27 basis points under New Zealand dollar swap. The lead managers were ANZ Institutional, Deutsche Bank AG and RBC Capital Markets. QTC is rated triple-A by the main rating agencies.

QTC said the issue was well received, with 77 percent going to offshore investors. This issue brings the total amount of QTC debt on issue to more than A$34 billion. The State funding body has an estimated borrowing program of A$7.6 billion for the 2007-2008 financial year.

Incoming

The battle is over in the sub prime markets. Now we are seeing the aftermath, as the wounded report and the dead go into bankruptcy.

This story from Reuters:

"NEW YORK, Aug 29 (Reuters) - Basis Yield Alpha Fund, a hedge fund specializing in corporate and structured credit, on Wednesday filed for bankruptcy protection in the United States amid mounting losses from U.S. subprime mortgage assets, court papers show.

The Cayman Islands-registered fund, run by the Australian firm Basis Capital, listed more than $100 million of assets and more than $100 million of liabilities in its filing with the U.S. bankruptcy court in Manhattan. The fund firm managed nearly $1 billion earlier this year.

In court papers, Basis Yield said it had in June begun to suffer a "significant devaluation" in its asset portfolio, following market volatility related to U.S. subprime lending defaults. It said the devaluation led to margin calls, which it was unable to meet, and the issuance of several default notices by counterparties seeking to close out trades or seize assets.

Basis said JP Morgan Chase Bank NA, Goldman Sachs International, Citigroup Global Markets Limited, Morgan Stanley, Lehman Brothers International (Europe) and Merrill Lynch International all issued default notices. Basis Yield said it has disputed many of these notices.

Earlier in the month, the hedge fund firm told investors that losses at one of its portfolios had lost more than 80 percent in assets. Basis is among a growing number of hedge funds to have be plagued by the credit market turmoil. In July, Sowood Capital lost $1.5 billion and was forced to close down."

Markets have calmed though this week.

In the first weeks of the fiasco, markets failed. We had no way of pricing some of these instruments secured by now suspect sub prime assets. To the point that French bank Paribas suspended redemptions from 3 of their funds.

Now at least we are seeing the extent of the losses. We know there are casualties. We are starting to see the extent of the losses. The markets priced in the end of the world as we know it. Now it is becoming clearer and it is better than terrible.

Still bad, but at least we can measure it. Markets love certainty….hence relative calm is returning.

Calm returns....for now

NEW YORK, Aug 20 (Reuters) - Calm returned slowly to financial markets on Monday, but there were lingering signs that credit problems persist despite policy-makers' insistence that the global economic growth would remain solid.

The Federal Reserve on Friday cut the rate at which it lends to banks to defuse the growing crisis in credit markets and encouraged more borrowing, particularly by big banks worried about their exposure to the beleaguered U.S. mortgage market. Deutsche Bank reportedly borrowed funds directly from the Federal Reserve on Friday, although it was unclear how much, the Financial Times reported on Monday.

However, the broader credit market seemed far from normal, particularly in the housing sector, where prices are falling and defaults are rising. "Investors' confidence in the mortgage financing space is not doing well," Larry Goldstone, chief operating officer of Thornburg Mortgage Inc, said in an interview with CNBC television on Monday.

In order to meet funding obligations, Thornburg said it has sold $20.5 billion of assets and reduced short-term borrowings by an equivalent amount. Adding to the uncertainty among investors, Fannie Mae, the largest source for U.S. home loans, said it will skip its monthly benchmark note issuance in August for the first time since May 2006.

Away from the trading rooms of Wall Street, policy-makers around the world struck a sanguine tone about the impact of market volatility on the global economy, even after the Fed said on Friday that the risks of the U.S. economy slowing have grown "appreciably."

Canadian Finance Minister Jim Flaherty told reporters on Monday that it would take "some time" for the turmoil in credit markets to be resolved, but that the fundamentals of Canada's economy remain strong.

Germany's Bundesbank said the outlook for the global economy remained positive despite recent market tension, which represented a "welcome normalization," albeit an abrupt one. "Nevertheless, the risks for the global economy have increased with the correction process in the U.S. property market," the German central bank said in its monthly report.

In the wake of the market turmoil, investors have sharply altered their forecasts for monetary policy. They expect the Fed, which added another $3.5 billion on Monday in short-term liquidity, to cut its key fed funds target rate and are no longer pricing in rate increases from the Bank of England. More than half of U.S. primary dealer banks polled by Reuters predict the Federal Open Market Committee will lower the fed funds rate at its Sept. 18 meeting, or even earlier.

The European Central Bank said it would again allot more funds than strictly necessary at its weekly tender, but aimed to reduce surplus liquidity in the short-term euro money market gradually as conditions normalize.

Australia's central bank also injected a sizable amount of liquidity into the banking system, seeking to temper upward pressure on some short-term money market rates.

But few investors are confident all the troubles stemming from the U.S. home loan market have yet seen the light of day, and they fear further market turmoil could cut growth.

Richard Shelby, a member of the U.S. Senate's Banking, Housing and Urban Affairs Committee, said banks would increase their mortgage rates in the coming weeks, exacerbating tight credit. "I think it will get worse before it gets better," Shelby said in Brussels. "There will be firms that will not survive. I don't think we should bail them out."

New Trade: NZD/JPY

Took a new position today, bought NZD/sold JPY at 79.50. Points are worth around 0.60 a month so we will see how it pans out.

NZD is rallying after recent selling. With $1 bil of new issuance in uridashi bonds today the NZD looks to have found a base.

I think the NZD/JPY will head back to over 90.00 at least so should be a good trade.
Time will tell!

Circuit Breaker

The US Federal Reserve has provided just the circuit breaker that the markets needed.

By cutting the discount rate, not the Fed funds rate, and in between meetings as well, they have reminded the banking system that they are there when needed.

This will calm markets and the timing was excellent.

Traders will have the weekend to sober up, and sanity will be restored next week.

How does it make sense for BHP shares to fall 20%?

The ore they dig out of the ground is still there, they have fixed prices to sell it and with the AUD/USD so much lower, they will make more money.

Expect markets to stabilise this week, won't go up much, but will range trade.

US Federal Reserve Acts

To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility.

The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points.

The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower.

These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding.

The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained.

In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco.

Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward.

In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably.

The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets. Voting in favor of the policy announcement were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Richard W. Fisher; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Michael H. Moskow; Eric Rosengren; and Kevin M. Warsh.

NZD close to bottom, watch for the move back up again

I have been trading the NZD for over 30 years. I have never seen the NZD/USD move as far, as fast...ever!

Thank God it's Friday, but still getting offshore calls wondering when it is safe to buy again.

I posted here in July that I thought the NZD had topped out, and I repeat:

The NZ dollar has topped out at 0.8109, nearly 17% from the lows seen at 0.6715 in March 2007. Now looks to retrace and could pull back into the 0.7400 area before stabilising.

The reason?

Not our economy, Not the RBNZ actions, Not any Government moves.

Purely offshore pressures.

See story below: Volatility sweeps global markets.

That's the reason: the rise of global risk aversion; something the RBNZ has been praying would happen.Investors are pulling money home, worried about potential losses.

It could run some way yet, as the US property market disasters come home to roost.

That means, currencies that were weak, like the Yen and Swiss franc, will be stronger, as funds are repatriated.

Currencies that were strong, like the NZD, AUD and GBP, will be weaker, as funds are withdrawn.

That means the NZD will weaken.Might not go too far yet, but that is the trend, with the first target 0.7500.

What would stop this going too far are calm markets.8.25% return is hard to beat, and that means the NZD cannot stay down for long.

Equally the Japanese will not want a strong Yen, and may talk of intervention again.

But for now, and the next few weeks, the NZD is finally on the back foot.

Well it has certainly gone further than I thought it would.

But the short NZD position taken at 0.7950 will certainly pay a few bills, having just exited at 0.6750.

Best to stay out of the markets now, until things stabilise.

I think the NZD/USD is close to the base around 0.6600-0.6700 area.

The next trade will be buying NZD selling JPY, ie a carry trade (yes they still work really well!).

But looking for the entry point at present. With any luck the Bank of Japan will start to protest at the stronger Yen, and a base in the NZD/JPY will appear.