Even though the Federal Reserve has been acting quickly by cutting interest rates to promote the orderly functioning of the U.S. credit markets, the outlook for the U.S. financial markets remains very bearish. In fact, several banks have been reporting major losses tied to the U.S. subprime market and other banks are even shutting down their mortgage business units. Many financial institutions are also demanding more dollars for their loans as they become more risk adverse and aware of counterparty risk. For instance, the spread between junk-rated corporate bonds and U.S. Treasuries surged 19 bps during this week to trade at a very high 452 bps. In sum, despite the recent easing on financial conditions, the outlook on the credit market remains bearish and we think the Federal Reserve will cut the Fed Funds rate by 25 bps when the FOMC holds its meeting in December.
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[li][B]Deutsche Bank estimates mortgage-backed securities losses could swell to as much as 400 billion dollars[/B] [/li][li][B]Banks Are Demanding More Dollars for their Loans as they Become Aware of Higher Counterparty Risk[/B] [/li][li][B]The Spread Between Junk-Rated Corporate Bonds and U.S. Treasuries surged 19 bps[/B] [/ul] [I]Click here to join DailyFX Analysts in discussing the Watch What the Fed Watches latest report.[/I][/li]
