It is very faint, but there seems to be a pulse. In fact it could be a bit more than that.
There was $41bn of corporate bond issuance last week, which was the highest weekly total in eights months and roughly equal the tally for all of last September and October when the credit markets froze, according to Tony Crescenzi of Miller Tabak & Co.
Of course, there are some caveats. First, January is a month when issuance rebounds from a Christmas induced lull and second, some of the issuance was backed by the US government – for example General Electric’s $10bn offering.
But, as Mr Crescenzi notes, last week’s tally was above a normal January ( in the same week a year ago issuance was $32bn).
In fact he reckons glaring evidence of healing in the credit markets is apparent on a number of fronts.
1) LIBOR has fallen dramatically worldwide.
2) Commercial paper issuance has increased substantially and commercial paper rates have fallen substantially.
3) The mortgage-backed securities market has rallied substantially, pushing mortgage-rates to all-time lows. Moreover, the yield spread between agency securities and Treasuries has fallen substantially.
4) Corporate and municipal bond yields have fallen sharply of late, including junk bond yields.
5) Corporate bond issuance is rebounding.
New support for the U.S. economy will arrive within weeks when the Federal Reserve initiates its Term Asset-Backed Securities Loan Facility (TALF), which will provide up to $200 billion for the asset-backed market. The facility is likely to revive credit extensions for automobile loans and leases, and credit cards and such. In doing so, consumer spending will be buoyed and this will eventually help stem job losses.
The lack of clarity on the depth and duration of the recession is limiting the upside potential in riskier assets for now, but developments in the credit markets should limit the downside in risk assets–hence the range trade. If recent gains in the credit markets are sustained, investors should increasingly move away from the range trade toward a bullish stance. This will of course take time.
And are some another signals to add to Mr Crescenzi’s list. The 3-month Libor-OIS spread fell below 100 basis points for the first time since September on Monday and this from Tuesday’s FT:
German healthcare group Fresenius is aiming to be the first company in 18 months to sell junk-rated bonds in Europe.
This market has been closed since the credit crisis took hold in the summer of 2007. The $650m offering, to be sold in euros and dollars, will be closely watched as an indicator of whether the European junk bond market can be revived.
This has become more important as the number of companies being downgraded to junk increases. While a successful sale would encourage other speculative grade rated borrowers to believe that they too could get junk issues away, Fresenius is being seen as an exceptional case.
Perhaps Dr Bernanke’s medicine is working.
Update: Or perhaps not. On Monday, BMW saw a three year $2bn offering flop and brokers says it will be a week until we know if the market is able to digest all this flow. This is be important because there is a long line of issuers waiting to come down the slip way. The real test of this recovery is yet to come.
Related links:
Corporate bonds find hope from new issues – FT.com