Friday, December 5, 2008
Some Credit Thaws Amid Freeze
The government has stepped in to oil several gears in the credit markets, but they remain squeaky. Since September, the Federal Reserve and the Treasury Department have agreed to buy short-term debt known as commercial paper directly from companies, insure debt issued by banks such as Goldman Sachs Group Inc. and Citigroup Inc., help finance investors' purchases of debt backed by consumer auto and credit-card loans and purchase mortgage-backed securities. All this is aimed at getting money flowing through the financial system and into the hands of companies and consumers. Their efforts have stabilized several of the worst-hit markets and allowed some companies to avert disaster. But they still haven't stimulated much lending back into the economy, which is reeling from rising unemployment and a declining housing market. In the case of many programs, there also is a lag time between its announcement and implementation. As U.S. auto makers plead for a bailout from Congress, the markets remain unconvinced that the plans will work. The Dow Jones Industrial Average fell more than 200 points Thursday as investors fled to the safety of U.S. Treasurys, which fell to lows again. Late Thursday in New York, the two-year note was up 4/32 point, or $1.25 for every $1,000 invested, at 100 26/32, to yield 0.837%, from 0.893% Wednesday. The 10-year note was up one point, or $10 for every $1,000 invested, at 110 10/32, to yield 2.569%, from 2.678% Wednesday. The three-month Treasury bill ended the day yielding nearly zero, at 0.02%. "The markets are still out of balance," said James Bianco, president of Bianco Research in Chicago. "In many markets the government has had to be the buyer of last resort to make the markets work." The market for mortgage-backed securities, or MBS, has improved since early October. Back then, the difference in yield between MBS that package loans guaranteed by Fannie Mae and Freddie Mac, both government-controlled entities, and comparable risk-free Treasury bonds hit a peak at 2.8 percentage points. That spread had fallen to about 2.1 percentage points Thursday, according to FTN Financial. Most of the mortgage-bond market's rally has occurred in the past two weeks after the Federal Reserve and the Treasury announced plans to aid the housing market, including direct purchases of mortgage bonds. Federal Reserve Chairman Ben Bernanke said Thursday that "more needs to be done" to stem the tide of home foreclosures. His comments follow a Thanksgiving week announcement that the Fed would directly buy $500 billion of mortgage-backed securities and $100 billion of debt issued by Fannie Mae and Freddie Mac. Mr. Bernanke also said earlier this week that the Fed may purchase Treasury bonds to help keep rates down. Separately, the Treasury announced Wednesday that it wants to initiate a plan to encourage banks to lend mortgages for home buyers at rates as low as 4.5%, though details are sketchy. The commercial-paper market, which feeds the immediate cash needs of many U.S. corporations such as General Electric Co. and Ford Motor Credit, has healed in the wake of several initiatives to shore up money-market fund managers' confidence that their investments have a backstop at the Fed. While many investors still are anxious about owning debt that matures in more than one day, the Fed last week bought nearly $300 billion of three-month commercial paper at relatively low rates of between 1% and 3.5%, according to Fed data. Other commercial-paper rates hover around 2%, closer in line with other short-term market rates such as London interbank offered rates. The corporate-debt market has been less responsive to government actions, despite banks' push to issue government-guaranteed debt at rates of about 3%. Companies such as Goldman Sachs, Citigroup, Bank of America Corp., Morgan Stanley and General Electric have taken advantage of the low rates, but it may be some time before they lend into the economy at higher rates, said analysts. Companies in weaker financial straits still would have to pay, on average, more than 20 percentage points higher than comparable Treasury-bond yields to borrow in the markets, according to Merrill Lynch. Investment-grade companies would have to pay 6.5 percentage points on average to issue debt in the market, according to Merrill Lynch.