Credit Concerns Haven't Gone Away

Ask the average trader, and he'll say that the Fed has eased credit fears. All is returning to normal. Around the world, however, liquidity is still very much a problem. LIBOR rates are well above Fed Funds rates, and these elevated rates are increasingly seen as a crisis in London.

The two charts above (click to enlarge) are latest data taken from the Fed website. They show clearly that asset backed commercial paper and lower-rated paper are commanding sizable spreads over AA financial and non-financial paper (and certainly above Treasury bills).

When there is a loss of faith in the assets backing the paper, prices fall and yields rise. Nothing in the Fed's actions to this point has changed that situation.

Meanwhile, 10-year Treasuries hit their lowest yield levels today since the stock market decline began. That flight to safety dynamic has also remained unchanged.

The stock market has behaved quite well lately, today's drop notwithstanding. But the credit markets continue to tell a different story, one that could have negative implications for some banks and the economy overall. That's worth keeping an eye on.

Comments

[Andreas Stover:]

Thank you for a good article, it really does not seem the market has a doubt in the world about the future and despite ample evidence, it still doesn't seem like the average investor understands that there is such a thing as a credit cycle.

When credit can't expand anymore because of a change in the default rate, which in turn was caused by low lending standards, the worst ponzi borrowers will default. This will trigger the gradual tightening of lending standards that characterizes a downturn in the cycle. If this really is the the beginning of such a downturn, as I believe it is, investors would do well to brace themselves for more trouble ahead during the next many months.

cyclesandtides.blogspo...

2007 Sep 06 11:49 AM