Wednesday, November 5, 2008

US credit woes remain

Published: Wednesday November 5, 2008

The credit markets gave mixed signals on Election Day yesterday, showing more gradual improvement in interbank lending but further troubles in such areas as corporate debt.

Lending rates between banks sank yesterday, suggesting a growing willingness to lend among financial institutions. The London Interbank Offered Rate, or Libor, on three-month loans in dollars fell to 2.71 per cent – the lowest level since June 9 – from 2.86 per cent on Monday.

But skeptics pointed out that rates remain far above their benchmarks set by central banks of 1 per cent in the United States, 3.75 per cent in the euro zone and 4.50 per cent in Britain. The spreads are actually twice as large as they were in mid-September, when Lehman Brothers Holdings Inc. went bankrupt.

Investors, still averse to risk, are tightly clinging to Treasury bills. The three-month bill, considered one of the safest assets around, saw its yield tick up marginally to 0.48 per cent from 0.47 per cent. A low yield suggests high demand.

Meanwhile, corporate bond rates keep rising. Because investors are growing more concerned about companies being unable to pay back their debt, those companies will have to pay more to get loans.

Even highly rated companies are feeling the pain – ratings agency Standard & Poor's said yesterday that the spread, or difference, between rates on investment-grade corporate bonds and treasury yields broke above five percentage points Monday to a new five-year record.

The United States corporate bond default rate rose again in October, bringing the tally of defaults so far in 2008 to 65, said Standard & Poor's.

Treasurys were mixed ahead of the election results. Analysts said that no matter who was elected president, the country is facing a huge deficit that will require the treasury to issue large amounts of debt, further complicating the debt markets.

When the supply of government debt rises, prices fall and drive up yields.

Source: Nation Newspapers

No comments: