Tuesday, March 25, 2008

Tracking the TAF

Every two weeks, the Fed issues the results of its latest Term Auction Facility. Today’s results (see table*) show a modestly improving trend in the bid to cover ratio – total propositions submitted, total propositions accepted. What is useful is to track the trend since the TAF was instituted last December 17th (see chart*) as it provides a good indication of the progress, if any, in the unfreezing of the core of the credit system (within the primary banks).

Investment Strategy Implications

Credit spreads may be the default tool re the status of the credit freeze. The TAF seems, however, to be an excellent additional tool enabling investors to better understand the status of the freeze. Based on the latest data and its trend, progress is being made but not quite enough as the bid/cover ratio still has a ways to go before it signals that funds accessed through the TAF are no longer vital. A reading closer to 1 would be desirable.

*click on images to enlarge

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