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US Short term interest rates turned negative Thursday as banks stockpiled government securities in order to polish their balance sheets for the end of the year. The growing appetite for short-term government debt reflects an effort by banks to present pristine year-end balance sheets to regulators and investors, a practice known as “window dressing” on Wall Street. With the US Federal Reserve maintaining an overnight target rate of zero to 0.25%, investors are demonstrating a willingness to completely forgo interest income, or even to take a small loss, to own securities that are seen as safe. This action has been exacerbated by the fact that all leading US banks, many sitting on big trading profits, will this year close their books at the same time, at the end of December. In past years, investment banks such as Goldman Sachs and Morgan Stanley reported annual results in November. Late Thursday, US T-bills maturing in January traded below zero %, traders said. Three month T-bills traded at 1 bp and six-month T-bills fell to a record low of 13 bp, compared with 14bp at the height of the crisis last year. Read more

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Every major country in the world is increasing their monetary supply, and all analysts expect inflation and a lot of it. So the US$64,000 Question is this; will there be any currency that comes out of this crisis to be considered the new base currency, like the US$ is now? The Big A is that right now nobody knows because there is no totally obvious currency, and that is why the US$ is sill doing well although it is in a long term down trend. This is happening in part because interest rates in the EU remain higher than in the USA, and higher interest rates attract investment capital, which first has to be converted to the higher interest currency, and that bids up its value vs. the dollar. Europe represents an economy about the size of the USA, so there may be some safety there. One can argue for the Swiss Franc, but you know the Swiss banks have had some problems too. So there is no clear picture emerging yet.

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The Bank of Japan is expected to cut interest rates after the government urged more support the ailing economy.

Investors saw a 40% chance that the policy board will reduce the overnight call rate from 0.3% at this week’s meeting, according to calculations made by JP Morgan Chase & Co. based on interest-rate swaps trading, up from 20% earlier in the day.

The meeting ends today (Dec. 19th, 2008)

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The U.S. Federal Reserve began a two-day policy meeting yesterday, it is expected to lower interest rates toward Zero and discuss emergency tools to end the country’s year-long recession. Observers expect the U.S. central bank to lower its target for benchmark overnight rates by at least 50bp to 0.5 percent and state it will deploy quantitative easing measures to restore growth. US industrial production fell 0.6% in November, with manufacturing output shrinking 1.4% to put it 7.3% below its year-ago level. A separate index of manufacturing activity in New York state hit a record low in December. The data offered a fresh sign that an already year-old US recession is deepening underscoreing the need for aggressive and unconventional actions by the central bank’s policy-setting Federal Open Market Committee. Some economists expect U.S. output to shrink at a 6% annual pace or more in the Q4 2008..

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