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WEEKLY INDICATORS OF FINANCIAL STRESS

TRENDS AND DEVELOPMENTS


• The TD Financial Stress Indices (TDFSI) were little changed, with a minor deterioration in the U.S.
and minor improvement in Canada.
• Short-term spreads (LIBOR-OIS) continue to narrow while long-run borrowing costs continue to
trend lower, as well.
• Demand for credit from the Federal Reserve has also receeded recently, with the most recent TAF
auction for 84-day credit (the longest term offered by the Fed) having had the least private
sector demand since December (as a share of available financing), in spite of the available amount
of financing being the least on offer so far this year, as well.

Richard Kelly, Senior Economist Beata Caranci, Director of Economic Forecasting


416-982-2559 416-982-8067

SUMMARY LIQUIDITY AND FINANCIAL STRESS INDICATORS


U.S. FINANCIAL STRESS CANADIAN FINANCIAL STRESS
TD ECONOMICS U.S. FINANCIAL STRESS INDEX TD ECONOMICS CANADIAN FINANCIAL STRESS
(TDFSI) INDEX (TDFSI)
Index Basis Points
600 600 600 600
This week: 139 This week: 133
500 500 500 500
Last week: 135 Last week: 135
400 400 400 400
Last year: 146 Last year: 116
300 300 300 300

200 200 200 200

100 100 100 100

0 0 0 0
11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09 11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09
US TDFSI is weighted average of seven financial series. Index value of Canada TDFSI is weighted average of four financial series. Index value of
100 denotes the peak stress level during the 2000-2002 period. 100 denotes the peak stress level during the 2000-2002 period.

U.S. STOCKS AND CREDIT TIGHTNESS CANADIAN STOCKS AND CREDIT TIGHTNESS
AVERAGE WEEKLY S&P500 LOSSES AND CHANGE AVERAGE WEEKLY TSX LOSSES AND CHANGE IN
IN U.S. TD FINANCIAL STRESS INDEX CANADIAN TD FINANCIAL STRESS INDEX
% loss* Change in index % loss* Change in index
20 20 100
200 Change in Canada
Change in US index
15 (rhs) 15 index (rhs) 75
150
Loss in S&P 500 Loss in TSX (lhs)
10 10 50
(lhs) 100
5 5 25
50

0 0 0 0

-5 -50 -5 -25

-10 -100 -10 -50

-15 -150 -15 -75


11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09 11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09
*Positive denotes a loss *Positive denotes a loss

Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg.


Last updated on: 5/4/2009 11:13 TD ECONOMICS
WEEKLY INDICATORS OF FINANCIAL STRESS

BANK FUNDING LIQUIDITY


SHORT-TERM MEDIUM-TERM
3-MONTH LIBOR-OIS SPREADS 5-YEAR BANK BOND-GOVT BOND SPREAD

Basis Points Basis Points


400 400 600 600

US US (A-rated)
500 500
300 Canada 300 Canada (AA-rated)
UK/Eurozone (avg) 400 400

200 200 300 300

200 200
100 100
100 100

0 0 0 0
11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09 11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09

Spreads likely need to fall below 150bps in th U.S. and 100bps in Spreads likely need to fall below 200bps in the U.S. and 150bps in
Canada and Europe to see relieved financial stress. Canada before seeing a return of significant medium-term financing.

PRESSURE ON U.S. LIBOR RATES CANADIAN VARIABLE RATE MARGINS


NY FUNDING RATE-LIBOR RATE SPREAD* 1-MONTH PRIME-BA SPREAD

Basis Points Basis Points


60 60 250 250

50 50
1-month 200 200
40 40
3-month
30 30
150 150
20 20

10 10
100 100

0 0

-10 -10 50 50
11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09 11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09
*New York Funding Rate is an alternative to LIBOR first created in Need to see a return to the long-run average of at least 160bps to
June 2008. ensure adequate margins.

MARKET LIQUIDITY FUNDING NEEDS


COST OF HEDGING INTEREST RATE RISK U.S. COMMERCIAL BANK BORROWING NEEDS
2-YEAR U.S. DOLLAR SWAP SPREAD GAP BETWEEN COMMERCIAL BANK ASSETS AND
DEPOSITS*
Basis Points US$ Billion
160 160 1,100 1,100
1,000 1,000
140 140 900 900
800 800
700 700
120 120
600 600
500 500
100 100 400 400
300 300
80 80 200 200
100 100
60 60 0 0
-100 -100
-200 -200
40 40 -300 -300
-400 -400
20 20 -500 -500
11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09 10/26/07 1/25/08 4/25/08 7/25/08 10/24/08 1/23/09 4/24/09

Spread likely needs to fall near 100bps to see relieved financial stress. *Three month change; Note data is available with a one week lag

Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg.


Last updated on: 5/4/2009 11:13 TD ECONOMICS
WEEKLY INDICATORS OF FINANCIAL STRESS

U.S. COMMERCIAL PAPER CENTRAL BANK LIQUIDITY


INTEREST RATES U.S. AUCTIONS
3-MONTH COMMERCIAL PAPER-TBILL SPREAD FEDERAL RESERVE TERM AUCTION FACILITY (TAF)*
0 Ratio** US$ Billion 160
Basis Points
500 500
Amount (rhs)
Asset-backed 140
Not asset-backed Bid-Cover Ratio (lhs inverted)
400 400 1 120

100
300 300
2 80

200 200 60

3 40
100 100
20

0 0 4 0
11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09 11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/1/09
Need to see levels back below 200bps to see relieved stress and *Total for 28-, 35-, and 84-day auctions; A value greater than one implies
closer to 100bps to see signficant funding. there was more demand for funds than was supplied.

NEW ISSUANCE BY MATURITY CANADIAN AUCTIONS


U.S. COMMERCIAL PAPER ISSUANCE BANK OF CANADA TERM PURCHASE AND RESALE
AGREEMENTS (PRA)
US$ Billion C$ Billion
200,000 200,000 14,000 14,000
1-4 Days >4 Days
12,000 12,000
150,000 150,000
10,000 10,000

8,000 8,000
100,000 100,000
6,000 6,000

4,000 4,000
50,000 50,000

2,000 2,000

0 0 0 0
11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/1/09 11/5/07 2/4/08 5/5/08 8/4/08 11/3/08 2/2/09 5/4/09
Spikes in 1-4 day issuance reflect inability or lack of safety to fund
at longer maturities.

CUMULATIVE CHANGE BY TYPE DISCOUNT WINDOWS AND OTHER LIQUIDITY


U.S. COMMERCIAL PAPER OUTSTANDING* OTHER SHORT-TERM CENTRAL BANK LENDING*

US$ Billion C$ Million US$ Billion


500 500 1,200 500
Asset-Backed U.S. Non-TAF Credits (rhs)
400 400 450
Financial 1,000
300 300 400
Non-Financial
Canada Special Purchase
200 200 Agreement (lhs) 350
800
100 100 300
0 0 600 250
-100 -100 200
400
-200 -200 150
-300 -300 100
200
-400 -400 50
-500 -500 0 0
11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/1/09 11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/1/09
Other provisions of credit by the central banks outside of the
*Change over 24 months prior
above auctions.

Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg.


Last updated on: 5/4/2009 11:13 TD ECONOMICS
WEEKLY INDICATORS OF FINANCIAL STRESS

CURRENCY MOVES
U.S. DOLLAR EXCHANGE RATE CANADIAN DOLLAR EXCHANGE RATE
U.S. DOLLAR EXCHANGE RATE* CANADIAN DOLLAR EXCHANGE RATE

Index Yen per US$ Euros per C$ C$ per US$


115 140 0.75 1.1

110 130
0.70 1.0
105 120

100 110 0.65 0.9

95 100
0.60 0.8
90 90
Yen (rhs) Trade-weighted (lhs) US Dollar (rhs) Euro (lhs)
85 80 0.55 0.7
11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09 11/2/07 2/1/08 5/2/08 8/1/08 10/31/08 1/30/09 5/4/09

*Higher values denote U.S. dollar strength *Higher values denote Canadian dollar strength

Source: Federal Reserve, Bank of Canada, Haver Analytics, Bloomberg.


Last updated on: 5/4/2009 11:13 TD ECONOMICS
WEEKLY INDICATORS OF FINANCIAL STRESS

GLOSSARY

LIBOR-OIS SPREAD: This spread is a measure of the funding costs between banks. LIBOR
(London Inter-Bank Offer Rate) is the posted interest rate at which banks borrow from each other,
typically at short-term maturities of as little as one day. Inter-bank borrowing is aimed at managing
cash levels (as opposed to borrowing to fund expansion which tends to be done with long-term
financing). Therefore, this rate is a reflection of liquidity stresses, or the inability or unwillingness
to lend cash to others at a very short term nature. LIBOR is also the benchmark interest rate for a
number of derivatives and other financial products, so it has a direct implication on borrowing costs
in general. OIS (Overnight Indexed Swap) is the interest rate for a derivative which trades only the risk
that interest rates might change in the near term. As such, this interest rate tends to stay relatively
close to the actual level of the interest rate set by the central bank. Taking the difference between
LIBOR and OIS is the premium the market is currently pricing for the risk of default (which is small
in short-term loans) and the heightened premium placed on having cash (liquidity risk).

5-YR BANK BOND-GOVT BOND SPREAD: Bank bonds must offer a high enough yield in order to attract
investors. Generally, the higher the yield, the higher the perceived risk, and therefore, the higher the yield
demanded by investors to buy the debt. Since the government is seen as having much less default risk
and much less liquidity risk than any given firm, government debt is taken as a proxy for the cost of
"risk-free" borrowing. By taking the spread between the two, we have a measure of the extra costs by
banks to raise longer-term funding. When these costs are high, firms tend to move into shorter-term
financing which reduces the immediate costs, but also increases the need to seek new financing
sooner when this debt matures (rollover risk). This extra demand for shorter maturity debt can also
further pressure short-term interest rates like LIBOR.

NEW YORK FUNDING RATE-LIBOR SPREAD: The New York Funding Rate (NYFR) is an alternative to
LIBOR created in June 2008. Rather than being market determined, each rate is established as the average
of a survey of banks each morning. In the case of LIBOR, the question is the rate at which your own bank
would be able to borrow from another bank. There has been concern in the current environment that
participating banks were intentionally given ow estimates due to the fear of being stigmatized. The NYFR
asks for a generic response of what a similar rating institution would likely borrow at. A higher spread
of the NYFR over LIBOR then could indicate increased stress in interbank lending.

1-MONTH PRIME-BANKERS ACCEPTANCE SPREAD: This is a measure important for Canadian


financial institutions. Bankers acceptances are the short-term debt generally used to finance ongoing
lending of Canadian banks, while the prime rate is the benchmark for variable interest loans offered to
consumers and businesses. A narrowing spread means that the costs of funds for the banks has not
changed to the same degree as changes to the prime rate. Since this margin has to compensate for
the losses banks will ultimately sustain as some borrowers become delinquent or default on their loans,
as well as the costs associated with making these loans, a narrowing spread has important implications
for banks' ability to make future loans. A sustained narrowing can lead to the need to limit potential defaults
by making safer loans.

U.S. DOLLAR SWAP SPREAD: Interest rate swaps are a derivative product which allows two parties
to "swap" their interest rate exposure. One party typically agrees to pay a fixed interest rate to the other
party over time, while the other party agrees to pay a floating interest rate, typically LIBOR, to the other.
Firms use it to reduce the risk of interest payments paid on their corporate debt or reduce the mismatch in
exposure to interest rate changes between their assets and liabilities, especially for those firms involved in
areas such as the mortgage market where interest rate risk is most acute. This is an important indicator of
financial stress due to its relatonship with LIBOR, as well as the fact the spread between the swap rate
and the Treasury rate of the same maturity is a good reflection of the liquidty of Treasuries in the market.

COMMERCIAL BANK ASSET-DEPOSIT GAP: Every Friday, the Federal Reserve publishes a consolidated
balance sheet of all U.S. commercial banks. Commercial bank assets include all the loans banks extend and
securities they buy. To finance these outlays, banks can rely on the deposits they hold or must try to borrow
money externally. By taking the difference of total assets and deposits, then, we get a measure of the
pressures on banks to finance their operations through borrowing.

Source: Bloomberg and TD Economics TD ECONOMICS


WEEKLY INDICATORS OF FINANCIAL STRESS

GLOSSARY

3-MONTH COMMERCIAL PAPER-TREASURY BILL SPREAD: Commercial paper is short-term debt


issued by financial as well as nonfinancial firms. It has a maturity of less than 270 days and typically less
than 30 days. It is generally used to finance operations that fall in between the day-to-day liquidity needs
addressed by LIBOR or the longer term operations financed in long-term debt markets. As with the bond
spreads above, the government Treasury bills are seen as "risk-free" equivalents so the spread gives a
measure of the extra risk seen in the debt of private companies. It is typically held by many mutual funds so
the spread is a reflection of costs of financing for firms, as well as stresses in the mutual fund industry.

COMMERCIAL PAPER ISSUANCE: While the interest rate measures the cost of this borrowing,
this measure tracks the amount of short-term debt being issued by firms. Sudden increases in issuance
imply a greater need for short-term financing. Spikes at the shortest of maturities also implies
increased uncertainty by investors over the prospects for the firm or economy. This increases the
frequency of having to borrow new debt, and since it tends to come at times when interest rates have
increased, means the total debt costs have risen as well.

COMMERCIAL PAPER OUTSTANDING: Measures the cumulative change in commercial paper by type
over the last 24 months. This can be a reflection of an inability to find buyers for this form of financing
as well as ongoing deleveraging.

TERM AUCTION FACILITY: The TAF was a liquidity facility introduced by the Federal Reserve in December
2007. Deposit-taking financial institutions participate in an auction with the winners paying an interest rate
determined in the auction in return for receiving cash for the specificed period (28-day and 84-day auctions
are currently available). To guarantee repayment, the financial institution must also put up financial
instruments of equal value in collateral, in effect allowing banks to swap a less liquid asset for something
more liquid. The bid-cover ratio is a measure of demand for these funds, dividing the total amount demanded
by the total amount supplied. As such, a value of one means demand matches supply, while a value greater
than one implies there was more demand from banks for these funds than were provided by the central bank.

TERM PURCHASE AND RESALE AGREEMENT: The TAF is the liquidity facility provided by the Bank of
Canada for Canadian commercial banks similar to the TAF details above.

A select number of these indicators are available from TD Economics on a daily basis from:
http://www.td.com/economics/comment/daily_fin.pdf

Bloomberg Tickers
US LIBOR: US0003M Index US OIS: USSOC Curncy US Tbill: USGG3M Index
Canada LIBOR: CD4803M Index Canada OIS: CDSOC Curncy NY Funding Rate: NYFR1M Curncy
UK LIBOR: BP0003M Index UK OIS: BPSOC Curncy 2-yr Swap Spread: USSP2 Curncy
Euro LIBOR: EU0003M Index Euro OIS: EUSOC Curncy US A1+ ABCP: ACPA090Y Index
US 5-yr Bank Debt: C0705Y Index US 5-yr Treasury USGG5YR Index US A1/P1/F1 CP: DCPB090D Index
Canada 5-yr Bank Debt: C3065Y Index Canada 5-yr Govt GCAN5YR Index BoC Term PRAs: BCMOTREP Curncy
Canada Prime Rate PRIMCAN Index Canada BA CDOR01 Curncy

Bloomberg tickers not available


US Commercial Bank Assets and Deposits, US CP Issues, US CP Outstanding, TAF Auctions,

Source: Bloomberg and TD Economics TD ECONOMICS


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