As fond as we are of our bearish reputations here on FT Alphaville, we are not averse to presenting what good news there is. And as Prieur du Plessis contends on his Investment Postcards blog, some credit indicators have improved markedly in recent weeks.
Here are some highlights, but for the full works (including charts), check out the post here.
LIBOR - “After having peaked on October 10 at 4.82%, the three-month dollar LIBOR rate declined sharply to 1.08% on January 14, but the healing process has since not made headway, with the current rate at 1.23%. LIBOR is therefore trading at 98 basis points above the upper band of the Fed’s target range – a great improvement, but still steep compared to an average of 12 basis points in the year before the start of the credit crisis in August 2007″
TED spread – “Since the TED spread’s peak of 4.65% on October 10, the measure has eased to a seven-month low of 0.91% – well above the 38-point spread it averaged in the 12 months prior to the start of the crisis, but nevertheless a strong move in the right direction.”
Barron’s Confidence Index – “This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been an up-tick in the ratio since its all-time low in December, showing that bond investors are growing somewhat more confident and have started opting for more speculative bonds over high-grade bonds.” It’s not all good news, however. In the CDS market, for instance, spreads on investment-grade US and European companies have narrowed considerably since November, whereas the cost of insuring the debt of insuring speculative-grade companies in this regions – and of all Asian and Japanese companies – has risen.
Moreover, while investment-grade companies were in January able to issue a slew of debt at relatively attractive levels, the outlook for junk-rated borrowers is much less positive. As du Plessis notes (emphasis FT Alphaville’s):
…the spread between high-yield debt and comparable US Treasuries was 1,630 basis points by the close of business on Tuesday. With the US 10-year Treasury Note yield at 2.89%, high-yield borrowers have to pay 19.19% per year to borrow money for a ten-year period. At these rates it is practically impossible for companies with a less-than-perfect credit status to conduct business profitably.
In short, there’s been some progress, but this crisis isn’t over yet – and we’ll be keeping our tin hats where we can see them.