Credit markets see signs of squeeze again
Fears are growing that world could suffer widespread recession and large investors are responding to the turmoil by deleveraging. Survive credit crisis | Ghosts of 1929
By Agencies |
NEW YORK: The credit markets showed renewed signs of stress on Friday as investors, worried about plunging stocks and the possibility of companies defaulting on their debt, fled once again to the safety of Treasury bills. Another dip in bank-to-bank lending rates offered little relief.
Fears are growing that the world could suffer a serious, widespread recession, and large investors, particularly hedge funds, are responding to the turmoil by deleveraging, or trying to pay off their debts. Deleveraging involves selling stocks and other assets, and in turn, causing them to plunge in value.
The cost of insuring against investment-grade corporate bond defaults briefly hit a record level early Friday, according to broker Phoenix Partners Group, citing the Markit CDX North America Investment Grade Index. That indicates that the fear that highly-rated companies won't be able to pay back their debt reached an all-time high.
Investors' flight to Treasury bills and a more than 250-point drop in the Dow Jones industrial average also suggested the modest improvements in the credit markets seen over the past several days might be hitting a plateau.
The three-month T-bill's yield fell to 0.83 percent, down from 0.94 percent Thursday and down from 1.01 percent Wednesday. A low yield indicates that demand is high, and that investors are willing to earn meager returns in exchange for a safe investment.
Three-month lending rates among banks in the US and Europe slipped again Friday, but just barely, amid fears over global economic growth.
The London Interbank Offered Rate, or Libor, on three-month loans in dollars dipped to 3.52 percent from 3.54 percent on Thursday. The so-called European Interbank Offered Rate for three-month euro-denominated loans eased to 4.918 percent from 4.921 percent.
The drop in Libor has been welcome, but banks are still hoarding cash. The Federal Reserve reported late on Thursday that banks' excess reserves more than doubled in the two weeks ended Wednesday to $282 billion from $136 billion in the two-week period ended Oct 8. That is up from $68.8 billion in the period ended Sept. 24, and up from $2.3 billion in the period ended Sept 10.
As banks get more wary about lending, many companies have rushed to rework their debt agreements, which should allow them more flexibility in a tight credit environment, but which also comes at a cost. Newspaper publisher A H Belo Corp., for one, said Friday it agreed to a new agreement that will raise the interest the company pays.
Fears are growing that the world could suffer a serious, widespread recession, and large investors, particularly hedge funds, are responding to the turmoil by deleveraging, or trying to pay off their debts. Deleveraging involves selling stocks and other assets, and in turn, causing them to plunge in value.
The cost of insuring against investment-grade corporate bond defaults briefly hit a record level early Friday, according to broker Phoenix Partners Group, citing the Markit CDX North America Investment Grade Index. That indicates that the fear that highly-rated companies won't be able to pay back their debt reached an all-time high.
Investors' flight to Treasury bills and a more than 250-point drop in the Dow Jones industrial average also suggested the modest improvements in the credit markets seen over the past several days might be hitting a plateau.
The three-month T-bill's yield fell to 0.83 percent, down from 0.94 percent Thursday and down from 1.01 percent Wednesday. A low yield indicates that demand is high, and that investors are willing to earn meager returns in exchange for a safe investment.
Three-month lending rates among banks in the US and Europe slipped again Friday, but just barely, amid fears over global economic growth.
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The London Interbank Offered Rate, or Libor, on three-month loans in dollars dipped to 3.52 percent from 3.54 percent on Thursday. The so-called European Interbank Offered Rate for three-month euro-denominated loans eased to 4.918 percent from 4.921 percent.
The drop in Libor has been welcome, but banks are still hoarding cash. The Federal Reserve reported late on Thursday that banks' excess reserves more than doubled in the two weeks ended Wednesday to $282 billion from $136 billion in the two-week period ended Oct 8. That is up from $68.8 billion in the period ended Sept. 24, and up from $2.3 billion in the period ended Sept 10.
As banks get more wary about lending, many companies have rushed to rework their debt agreements, which should allow them more flexibility in a tight credit environment, but which also comes at a cost. Newspaper publisher A H Belo Corp., for one, said Friday it agreed to a new agreement that will raise the interest the company pays.
Commercial paper rates are down from their lofty levels two weeks ago, but are ticking higher again. The Federal Reserve will start buying commercial paper, the short-term loans that companies sell to raise cash, from companies on Monday. General Electric Co said it has registered to tap into the facility; earlier this week, American Express Co. indicated that it was interested as well.
For longer-term corporate debt, demand has dried up for anything below investment grade. Investment-grade companies like Pepsi Bottling Group Inc and Baker Hughes Inc. have been able to sell bonds recently, but four weeks have passed without any debt issuances from non-investment grade companies, noted John Atkins, a fixed-income analyst at IDEAGlobal.com.
And market rates for both investment-grade and non-investment grade bonds, when compared to Treasury yields, are at record highs, Atkins said. "It's frankly untenable for people to borrow at these rates," he said.
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