Interest Rate Roundup

Monday, March 09, 2009

Credit crisis indicators perking up again

There's a good story in the Wall Street Journal this morning about the return of widespread credit fears. Its piece focuses on action in the corporate bond market. But several of my indicators are also suggesting that the market is really getting spooked again.

The dollar index is ripping again, for instance, a sign that money is moving from peripheral, higher-risk investments to the center. Two-year swap spreads, which bottomed out at just under 50 in mid-January, are also breaking out to the upside now, currently +4.25 bps to 81.50. And of course, stocks have been dropping sharply for several weeks now.

More from the Journal below:

"After what seemed like the beginning of a thawing of debt markets early in the year, sentiment has deteriorated, analysts say. The markets remain open only to the strongest companies. A rally in U.S. Treasury bonds last week reflects another bout of flight-to-quality buying. Junk bonds now yield 19 percentage points more than safe Treasury bonds, up from a 16-point spread in February, according to Merrill Lynch. The spread is still narrower than the 21-percentage-point premium reached last December, but any widening shows investors are becoming more fearful.

"Part of the problem is that investors are still waiting for key details from the government about its plans to bolster U.S. banks and unfreeze the credit markets. After launching a $1 trillion program to kick-start consumer lending last week, the Obama administration is considering creating multiple investment funds to purchase bad loans and other distressed assets. The intent of the funds is to stabilize the prices of good assets and restore investor confidence. Without more clarity from the government on its bailout plans, the market could continue to drop, say analysts. That would further harm the economy and the institutions the government hopes to help, compounding its task of shoring up the financial system.

"The credit markets are a mess because the economy is a mess," says Thomas Priore, chief executive of ICP Capital, a New York fixed-income investment firm. "There's fear out there that's driving down every asset class simultaneously. It illustrates a lack of investor confidence in the government's plan for fixing the financial infrastructure."


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