Credit markets tight after bailout OK
Posted on Saturday, October 4, 2008
URL: http://www.nwanews.com/adg/Business/239230/
NEW YORK — The stranglehold on the credit markets remained tight Friday after the House approved a revised $ 700 billion financial bailout, with investors still dubious about the plan’s ability to boost the faltering U. S. economy.
Anxiety among investors kept Treasury-bill demand high; the yield on the three-month bill slipped below a half percent.
Most market participants have been regarding the rescue plan as strong medicine for what’s ailing the financial system, but not a cure-all.
“At best, we can hope that it stems some of the more intense risk from the credit crisis. It prevents things from spiraling out of hand here,” said JPMorgan Chase economist Michael Feroli.
Some are worried the plan will not work at all.
“Nobody knows how it’s going to succeed,” said Howard Simons, strategist with Bianco Research in Chicago. “It seems the American public had better sense than Wall Street and Washington — the American public said, don’t throw good money after bad.”
When the Treasury buys banks’ risky assets, it should help alleviate investors’ worries about the institutions’ solvency and free them up to do more lending. But that process will be far from instantaneous, and borrowing could remain very expensive for some time. With the economy in such a weak state, lending to consumers and businesses will still appear risky until certain factors — particularly employment and the housing market — improve.
Spectrum Yarns Inc., a North Carolina textile company, said it closed two plants and laid off 200 workers this week because it got turned down by a North Carolina bank, a New York finance company and several private lenders.
And it’s going to get even harder for individuals to obtain home loans. Banks have become more stringent in their mortgage underwriting, and Wisconsin’s affordable-housing agency recently suspended making loans for single-family homes because it was unable to sell tax-exempt mortgage revenue bonds and raise capital.
On Friday, the London Interbank Offered Rate, or LIBOR, for three-month dollar loans rose to 4. 33 percent from 4. 21 percent Thursday. That bank-to-bank lending rate has been rising all week, showing that banks are growing less and less willing to lend out their cash for longer than overnight.
The London Interbank Offered Rate is tied to many consumer rates such as adjustablerate mortgages.
Overnight lending has gotten significantly cheaper — the rate for overnight dollar loans plunged to a hair below 2 percent on Friday, the lowest rate in nearly four years, from 2. 67 percent on Thursday.
That overnight rate is now below the Fed’s key bank-to-bank overnight lending rate, known as the target fed funds rate, of 2 percent. It appears that central banks’ decision to ramp up their lending to financial institutions over the past couple of weeks is having a positive effect.
But that’s little solace to borrowers who need a loan for longer than overnight.
Over the past week, the amount of short-term corporate debt known as commercial paper on the market has plunged. And banks and investment firms have borrowed in record amounts from the Federal Reserve’s emergency lending facility.
Money market mutual funds, usually the biggest buyers of commercial paper, have run for safety lately after a money market fund “broke the buck” two weeks ago due to its exposure to Lehman. When a fund breaks the buck, it does not have enough assets to cover every dollar invested in it. Instead of commercial paper, they’ve been investing in Treasury bills.
“There’s really no theme except the theme of survival,” said John Spinello, bond strategist at Jefferies & Co., referring to the constricted trading in the credit markets Friday.
The impact of the credit market seize-up has been widespread, affecting individuals, small businesses, large companies and municipalities.
Gov. Arnold Schwarzenegger said Friday that California might take out short-term loans from the federal government if the markets don’t loosen up.
Also Friday, YRC Worldwide Inc., one of the nation’s largest trucking companies, said it drew down $ 325 million on a credit line to repay some debt that matures this year and next.
After the House’s vote Friday afternoon, the yield on the threemonth Treasury bill slipped to 0. 49 percent from 0. 70 percent late Thursday. There has been no let-up in demand for T-bills, seen as the safest assets around, even though they are offering extremely low returns.
There was little change in the strained credit default swap market, either, according to data from Phoenix Partners Group. Credit default swaps are essentially insurance policies against bond defaults; when rates are high, it means the market is betting on a higher probability of a company failing to pay back its loan.
The two-year Treasury note fell 5 / 32 to 100 19 / 32, with a yield of 1. 70 percent, up from 1. 62 percent late Thursday.
The 10-year note fell 15 / 32 to 102 19 / 32, and yielded 3. 68 percent, up from 3. 64 percent.
The 30-year bond fell 8 / 32 to 105 21 / 32, and yielded 4. 17 percent, up from 4. 16 percent. Information in this article was contributed by Emery P. Dalesio and Judy Lin of The Associated Press.