Day: May 7, 2009

Stress tests signal more intervention

By Tom Braithwaite in Washington

Published: May 7 2009 17:01 | Last updated: May 7 2009 20:13

The stress tests on the 19 biggest US banks pave the way for an ongoing interventionist approach to regulation, Ben Bernanke, chairman of the Federal Reserve, signalled on Thursday.

Hours before the publication of the results of the tests, which are expected to show that banks including Citigroup and Bank of America will need to raise equity, Mr Bernanke told the Chicago Fed that the “exercise has been comprehensive, rigorous, forward-looking, and highly collaborative… Undoubtedly, we can use many aspects of the exercise to improve our supervisory processes in the future.”
With the US government in the throes of a broad regulatory overhaul, Mr Bernanke said that liquidity and risk management would be subject to “equal emphasis” with capital standards, which fell short in measuring the health of the sector.

“Although capital remains a critical bulwark of a strong banking system, the crisis has also demonstrated the importance of effective liquidity management,” he said.

“Along with our colleagues at the other US banking agencies, we are monitoring the major firms’ liquidity positions on a daily basis and are discussing liquidity strategies, key market developments and liquidity risks with the firms’ senior managements.”

The stress tests are expected to show all the banks passing a benchmark Tier 1 capital ratio, but regulators believe that is no longer an appropriate measure of strength. Both the Treasury and the Fed are focusing more on tangible common equity.

Leaked information from the tests has buoyed the stock market in recent days as investors have grown increasingly confident that any capital shortfall at the most troubled institutions was not as big as feared. Shares on Thursday fell however as the results of the tests got closer.

Tim Geithner, Treasury secretary, said on Wednesday in an interview with PBS television’s Charlie Rose programme that there were “very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward”.

Mr Bernanke also signalled that pay should be reformed at banks, with bonuses set up to focus on long-term success rather than short-term profits. “Bonuses and other compensation should provide incentives for employees at all levels to behave in ways that promote the long-run health of the institution,” he said.

Copyright The Financial Times Limited 2009

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Treasuries Tumble as Bond Sale Draws Higher-Than-Forecast Yield

By Dakin Campbell
May 7 (Bloomberg) — Treasury 30-year bonds fell the most in about four months as investors demanded higher-than-forecast yields at today’s auction of $14 billion of the securities with the U.S. slated to sell a record amount of debt this year.

“This is a problem,” said Chris Ahrens, head interest- rate strategist at UBS Securities LLC in Stamford, Connecticut, one of 16 primary dealers required to bid in Treasury auctions. “The market required a fairly significant discount to buy the bonds.”

Yields on the securities climbed to a six-month high as the bond auction drew a yield of 4.288 percent, higher than the average forecast in a Bloomberg News survey of seven bond- trading firms for a yield of 4.192 percent. Demand was below average, judging by total bids.

The benchmark 30-year bond yield climbed 16 basis points, or 0.16 percentage point, to 4.26 percent at 1:22 p.m. in New York, according to BGCantor Market data. The 3.5 percent security due in February 2039 dropped 2 18/32, or $25.63 per $1,000 face amount, to 87 10/32. The 10-year note yield increased nine basis points to 3.28 percent.

The auction’s so-called bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.14, compared with an average of 2.24 at the past 10 sales of the maturity. Thirty-year bonds yielded 3.64 percent at the last sale, on March 12.

Today’s auction began the Treasury’s monthly sales of the so-called long bond, up from quarterly offerings at the end of last year. That means the government will boost sales of the security from $35 billion in 2008 to $120 billion this year, according to Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 16 primary dealers that trade with the central bank and are required to participate in Treasury auctions.

‘More Attractive’

The yield on the benchmark 30-year bond reached 4.2820 percent, the most since Nov. 14, while the 10-year yield touched 3.3005 percent, the highest since Nov. 25.

“Treasuries are getting more attractive here,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. If 10-year note yields rose to 3.3750 percent, it would be “a good entry point for a short-term trade,” he said.

Initial claims for jobless benefits decreased by 34,000 to 601,000 in the week ended May 2, the fewest since late January, the Labor Department said in Washington. The median forecast in a Bloomberg News survey was for 635,000 claims. A separate report tomorrow may show employers cut 600,000 jobs in April, fewer than the 663,000 they eliminated in March.