As the market waits on the vote for the Emergency Economic Stabilization Act of 2008, which includes the Troubled Asset Relief Program (TARP), research is coming out on initial thoughts about it.
Deutsche Bank Securities, for example, notes the economic effects are twofold: there is improvement in economic capital as the valuations of risk mortgage assets are raised above their distressed-pricing levels, and it reduces the information asymmetry by transferring complex assets away from the private sector balance sheets and onto the public sector balance sheet.
Regarding the funding outlook, it appears mixed. Credit Suisse analysts believe it will remain an issue as several large funding market participants have been effectively removed, and capital remains in short supply at many financial institutions. This means, say analysts, balance sheet availability for short-term funding will likely remain tight, although it will eventually improve as the markets stabilize and there is less fear of major deleveraging occurring.
Credit Suisse also doesn"t expect credit condition will ease any time soon. Institutions will likely remain in capital preservation modes with only the best creditors likely to have access to capital - but even those loans will see relatively wide spreads.
As far as the impact on the curve, Deutsche anticipates the initial effect on the curve will be a flattening sell-off as an anticipated $1.5 trillion deficit will initially be funded on the short end. The short end currently is the most able to take on the ramp up in issuance, says Deutsche, but longer term issuance will get scaled up with potential reopening of 10-, 30- and possibly 2-year issues more frequently. They added there is the potential for creation of new maturity points such as the 3-, 7- and 20-year. Credit Suisse suggests as well that the 10-year will probably go to monthly issuance, while the bond will probably to a quarterly basis for new 30-year issuance.
For the near term, however, Credit Suisse believes Treasurys will continue to be well bid on near term concerns related to deflation and the continued need for the Federal Reserve to add liquidity persist.