Wednesday, March 4, 2009

More Signs of Credit Thawing

From Bernanke's testimony yesterday:

The measures taken since September by the Federal Reserve, other U.S. government entities, and foreign governments have helped improve conditions in some financial markets. In particular, strains in short-term funding markets have eased notably since last fall, and London interbank offered rates, or Libor--which influence the interest rates faced by many U.S. households and businesses--have decreased sharply. Conditions in the commercial paper market also have improved, even for lower-rated borrowers, and the sharp outflows from money market mutual funds in September have been replaced by modest inflows. In the market for conforming mortgages, interest rates have fallen nearly 1 percentage point since the announcement of our intention to purchase agency debt and agency mortgage-backed securities. Corporate risk spreads have also declined somewhat from extraordinarily high levels, although bond spreads remain elevated by historical standards. Likely spurred by the improvements in pricing and liquidity, issuance of investment-grade corporate bonds has been strong, and speculative-grade issuance, which was near zero in the fourth quarter, has picked up somewhat more recently. Nevertheless, significant stresses persist in many markets. For example, most securitization markets remain closed, and some financial institutions remain under pressure.

Let's look at some charts to see how this is playing out

Rate on 30 day commercial paper spiked at the end of last year but have since come down

Issuance from the non-financial sector is good, but asset-backed and financial issuance is still weak.
And spreads have definitely come down.

All the Libor rates have dropped considerably. In addition, the same link shows a drop in mortgage rates.

In addition,

Companies with risky credit ratings are lining up to tap the speculative-grade, or "junk," bond market for funds as they fear the window of opportunity could soon close.

The recent turmoil in the stock market and continuing problems at large financial institutions including Citigroup and American International Group have heightened fears that those suffering big losses will be forced to sell debt securities to raise precious capital.

Such selling could crowd out new debt sales, as had been the case last autumn.


Still, it isn't cheap to issue debt in the high-yield market with interest rates for risky companies raising new debt coming in near 10% -- and that is after selling the bonds at a discount. But the incentive is there to get in while the water's still warm. It could always get worse.

"There really doesn't seem to be any floor for how low things can go," said Scott Grzankowski, a former hedge-fund trader and now an analyst at KDP Advisor. "So if you have funding needs you might as well tap the capital markets now in case they seize up like they did three months ago."