Winter thaw: Credit crunch shows more signs of easing
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It’s apparently no comfort to the still-falling stock market, but the global credit crunch is showing more signs of easing in the new year.
The rate major banks are charging one another for short-term loans -- the three-month London interbank offered rate, or LIBOR -- fell to a 5 1/2 year low of 1.09% today, down from 1.16% on Monday and down from 1.41% a week ago.
Three-month LIBOR had spiked as high as 4.8% in mid-October as the credit crisis worsened and banks cut off funding to one another.
The decline in LIBOR has improved another key indicator of banks’ money costs: the so-called TED spread, which is the difference between three-month LIBOR and the three-month U.S. Treasury bill yield. It’s a quick way to see how much more banks are paying to borrow than the Treasury.
The TED spread now is 0.98 of a percentage point, a five-month low, according to Bloomberg News data. The last time it was below 1% was in mid-August, before the bottom fell out of credit markets early in September.
Another sign that the credit market ice floe is slowly breaking up: Companies have been able to raise tens of billions of dollars in the bond market over the last week, as eager investors have stepped up to buy new debt.
Corporate bond issuance last week totaled $41 billion, nearly an eight-month high, according to Bloomberg.
Today, companies including McDonald’s Corp., FedEx Corp. and Amgen Inc. are in the market to sell a total of at least $11.4 billion in new bonds, Bloomberg estimated.
Demand for corporate bonds has surged in part because many brokerages and other financial advisors are telling clients that high-quality company debt is a less-risky way than stocks to bet on an eventual economic recovery. With bonds, at least you’re earning interest while you wait for things to get better.
For many consumers, the best indicator of improved credit-market conditions is the ongoing slide in mortgage rates, which has fueled a refinancing boom. The average 30-year home loan rate nationwide was a record low 5.01% last week, down from 5.47% in mid-December.
Michael Darda, chief economist at investment firm MKM Partners, said the continuing decline in short-term bank funding costs, and the jump in corporate bond issuance, show the Federal Reserve ‘is having some success treating the symptoms of the credit crisis.’
Still, he said, ‘We have great reluctance to sound the ‘all clear’ bell for the U.S. economy considering the source of the crisis -- falling home prices and high household leverage -- remain stiff head winds.’
He’s right, but we’d be in far worse shape without this thawing of credit conditions, modest though it may be.
-- Tom Petruno