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Credit markets continue to thaw

Mortgage rates slide, as does the cost of loans between banks. Demand is surging for corporate bonds.

January 14, 2009|Tom Petruno

The global credit freeze is showing the clearest signs yet of thawing since the Treasury and the Federal Reserve launched a massive rescue of the financial system last fall.

For consumers, the best indicator of better credit-market conditions is a continuing slide in mortgage rates, which has fueled a refinancing boom. The average 30-year home loan rate nationwide slid to 5.01% last week, a record low and down from 5.47% in mid-December.

A more arcane but closely watched indicator -- the interest rate major banks charge one another for three-month loans, which rocketed in October at the height of the financial crisis -- fell to a five-year low Tuesday.

Another sign that the credit-market ice floe is slowly breaking up: Companies have raised tens of billions of dollars in the bond market in the last week as eager investors have stepped up to buy new debt.

Last week companies issued $41 billion in bonds, the biggest weekly total in nearly eight months, according to Bloomberg News. On Tuesday, companies including McDonald's Corp., FedEx Corp. and Amgen Inc. offered $16.7 billion in new bonds for sale.

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.

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."

Federal Reserve Chairman Ben S. Bernanke said Tuesday that the financial system would need even more government aid to return to normal, a prerequisite for a "lasting recovery" in the economy, he said.

Despite the progress on the credit front, stocks have slumped this year on continuing worries about the economy.

Four months ago, interest rates on loans between banks began to soar, reflecting fear that more big financial institutions would fail under the weight of losses on mortgage loans and other bad debt. After Lehman Bros. Holdings Inc. filed for bankruptcy protection in mid-September, the credit markets virtually locked up.

The government launched a series of emergency measures, including the Treasury Department's $700-billion bailout of financial companies.

As the crisis raged, the London interbank offered rate, or LIBOR, on three-month loans between banks spiked to 4.8% in mid-October

The rate dropped to 1.09% on Tuesday, down from 1.16% on Monday and 1.41% a week ago.

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 Treasury bill yield. It's a quick way to see how much more banks are paying to borrow than the Treasury.

The TED spread Tuesday was 0.98 of a percentage point, a five-month low. The last time it was below 1% was in mid-August.


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