Credit Markets: Very Cautious

John Jansen is of course the place to go for updates on the credit markets, and something very interesting seems to be happening right now, which is that nothing very interesting seems to be happening right now. Says Jansen:

Many traders have been forewarned to keep their activity to a minimum. Senior mangement does not want someone lobbing a plugged in toaster into the crowded swimming pool. So until participants can figure out how the next act unfolds liquidity should be impaired and activity subdued.

I thought that European credit traders would follow the lead of their US counterparts; in reality it seems that the opposite is true, and that US traders too are stepping very gingerly right now. The upshot: no one's panicking, but there's no relief rally either, and credit spreads are still wide. Things could still get ugly when volume returns: the Fed at this point will be hoping that activity picks up relatively slowly, and that traders ease gently back into confidence in markets and financial institutions.

Steve Waldman is also worth reading, and has reason to be hopeful that Bear will be the last bank to collapse, now that the Fed's lending to investment banks:

If this had been in force last week, Bear Stearns would still be a proud Wall Street titan, and we wouldn't have heard a thing...
Given the Fed's new facility, if you think (as I do think) that the Fed would lend taking a 15% haircut from par on Monopoly money to prevent another major firm from falling, I have a hard time seeing Lehman going under.

If Lehman survives the week, we might even be able to begin to hope that the Bear collapse really did mark a market bottom in terms of confidence and liquidity.