Creditville: Mixed Signs / Corporate Bonds Under Distress

A: A quick check here as there are good & bad signs since the peak of fear indicators a few weeks ago. As LIBOR & TED spreads ease, the corporate bond market seems to be getting way worse. Mish was all over this two days ago. I discuss corporate bond spreads to treasuries here every now & then, last being back in February, as another indication of stress in the debt markets. The wider the spread, the larger the distress. Well, spreads have widened big time blowing way past the levels we reached when Bear Stearns had to be rescued.

First, lets start with the good news, LIBOR is down noticeably from peak levels of last week. The following indicators are showing signs of easing (courtesy of Across The Curve):

Second, the TED spread is down. In short, the TED spread is the difference between 3-Month LIBOR and 3-Month Treasury Bills. The TED Spread is now below 3, after hitting peak levels of about 4.7 in the last two weeks. As LIBOR surged (indicating a lack of trust and unwillingness of banks to lend to each other), and short term Treasuries fell (indicating a flight to safety), the TED spread jumped. When Bear Stearns collapsed, the TED spread hit 2. We are still high, as normal is well under 1, yet going the right direction. Here is the TED Spread:



But what is not easing, and in fact is getting worse, are corporate bonds. David Merkel over at The Aleph Blog points out:

Pepsico issued $3.3 billion of corporate debt yesterday. For a company with recession-proof products and a Aa2/A+/AA- balance sheet, for them to pay 4%+ over Treasuries is astounding. Liquidity? What liquidity? If financing needs are outside the A-1/P-1/F1 CP box, there is no help. Not that there should be help, but the corporate bond market is a truer indicator of our stress than the money markets, which still aren’t in great shape.

You can't get more real world than this. If you want me to put this into pictures for you, here you go. Take a look at the Wachovia High Yield Corporate Bond Index vs. iShares Lehman 7-10 YR Treasury Bond Fund; notice the widening spread:



What David said above about Pepsico, is shown in the chart above. We are truly in unprecedented territory. The fed is pouring buckets of water over the wildfire trying to put out flames in one place, only to see more flames erupt elsewhere. The latest is the $540Bln dollar facility to ease stress in the money markets. Anyone keeping track of these trillions of dollars being poured into the wildfire? All I know is, it doesn't feel like its working!!