"Panic" sets in to the debt markets part 2
In July 2007, I thought I knew what panic looked like (see prior post “‘Panic’ sets in to the debt markets” July 29-07). But today, institutions decided that they were done with the “paper” they had come to love over the years. A utiliiy’s commercial paper? Take it back. Banks? How do I know they’ll be able to roll it over when it comes due?
The freeze that shrouds Canada’s ABCP market has come to infect many issuers around the world.
Institutional investors wanted just one thing today. U.S. T-Bills, even if they had to pay through the nose to get them. No yield for 30 days? No problem. At least they knew the money would be there when it came due. Never, in the history of the U.S. Treasury, have institutions been prepared to take U.S. Government paper in exchange for no interest whatsoever. But that’s where they traded at one point earlier today.
What’s remarkable is that Joe and Jill Retail seem more calm than the average PM. It could also be resignation, or a feeling of helplessness. There’s also the sense that the reliance on FDIC and CDIC is quite strong. As many Canadians know, firms can hit the wall (think Confederation Life), and retail bank customers have learned to watch the per bank insurance limits provided against deposits.
It could also be the retail investors are so trained to “ride out the bad times”, for fear of missing those very rare massive stock rallies that, historically, make up the lion’s share of any index gains during a year. Enron shook the system, but the market came back. The subprime mess started in February 2007 (see prior post “Too much credit where it’s not due?” February 12-07), but that didn’t stop the Dow from charging ahead all the while: rising from 12,600 to 14,200 prior to Canadian Thanksgiving.
Retail investors need to reassess, with some professional advice if possible, what their investment risk profile is, their investment horizon, and their investment goals. If what you currently own in your portfolio doesn’t match up with those three gut checks, there is time to make changes right now.
Your institutional brethren are doing it as we speak. And things can get worse.