Corporate Credit Distress - The Next Wave Is Here
A: As Paul Krugman says, "...Don't Panic About The Stock Market...Panic about the credit markets instead. Interest rate on 3-month Treasuries at 0.02%; interest rate on high-yield (junk) bonds over 20%." I'll leave it there. Other credit indicators, such as LIBOR, came in after co-ordinated fed rate cuts, the 1.3Trln CP facility, and the $290Bln of TARP bank injections. The one thing that got worse was corporate debt spreads! Wayyyyy worse!
Krugman is spot on. When 3-Mth treasuries are 0.02%, and high yield junk bonds are 20%, something is very very wrong. Take a look at the widening spreads between the Wachovia High Yield Corporate Bond Index vs. iShares Lehman 7-10 YR Treasury Bond Fund for a clue on the distress in the corporate bond market:
Stocks are the lowest of the todem pole in the investor classes. When you buy shares in a company's stock, you are the last to get fed when the food is close to running out! If corporate debt is this distressed, we should know why stocks are behaving the way they are. Fitch recently downgraded $300 Bln worth of U.S corporate bonds in Q3, and more is likely on the way as $500Bln more worth of debt matures in 2009. Ugly. Think of refinancing rates as this debt is rolled over. Debt tied to shopping malls, office buildings, and other forms of commercial property was especially hard hit, and rightfully so. This IS the next wave of the credit crisis!
Comments (7)
You are so right. Spreads for corporate debt for companies like MET and MO are insanely high. It is as if no one has any confidence in any business' ability to survive.
The bottom line is that Obama needs to come in and immediately get work on rebuilding our countries manufacturing base, and doing so with the use of renewable energy. He needs to control the unions and the trail lawyers, who are two huge impediments to progress, and he needs to cap executive compensation for these new ventures. If the government is going to be cutting the checks, then the government gets to set the terms. We are at juncture in history where we need a president that is going to go over the heads of Congress, special interests, and even his former supporters, to push through the agenda that is necessary to save this country.
Obama comes to power with the wind at his back. He has a cult of personality, the media love him, and he is responsible for the new power of the Democrats in Congress. He needs to leverage that power by crafting a massive stimulus package that not only kick starts our economy, but does so in a way that enables us to maintain our position in the world.
I did not vote for Obama, but I am praying for him. If he comes into office with a clear vision, that is the right vision, and if he executes it with confidence, he can right this ship of state and this economy.
Posted by mh23 | November 21, 2008 8:42 AM
mh23 - I think the worst of the deleveraging will be almost over by the time Obama takes office. I think he will surprise many. I think he has a pull in him to fix this under his watch, but of course the beginning will bring with it the worst part of this crisis where it hits mainstreet.
We still have alt-a, prime, credit cards, and cmbs to deal with. I think they will use the rest of TARP to inject capital, so banks dont have to do it privately on open market, and then I think we will get TARP II to buy some distressed paper. Just a hunch
Posted by Noah | November 21, 2008 9:36 AM
If Obama can
"control the unions and the trail lawyers"
Then I will truly believe in this message of change, otherwise its "business as usual" up there in Washington with special interests controlling this country...
Posted by uwsider | November 21, 2008 11:18 AM
I think credit will be more available when Obama takes office, but I'm still on the fence re the effects the CMBSs will have. Seems like there's still quite a bit of room for pain in the commercial real estate world.
Posted by brenda | November 21, 2008 1:29 PM
More dangerous than a stock market crash, a credit freeze has direct consequences for the reast of us “regular” folks. Most of us see it in terms of personal credit:
* Car loans.
* Private student loans.
* Mortgage loans.
* Credit cards.
* HELOCs are being frozen.
* Interest rates go up in some cases, especially on mortgage loans.
In some cases, this might be a good thing. It means that we have to re-evaluate our priorities and figure out what we want to spend our money on.
Posted by blackfoot | November 21, 2008 1:44 PM
The tail is wagging the dog in ways that are surreal. Insurance cos. which recently had been the lenders of last resort for commercial real estate are now buying corporate paper instead because the spreads are so huge. Interestingly, these guys started cutting the LTVs they would give on real estate loans 4 years ago (they learned their lesson on real estate lending in the 1990s - yet many are still getting killed in other investments). While insurance cos. were pulling in their horns on lending, borrowers were getting more and more aggressive, with many taking on only short-term financing, because they were conditioned that rates only go down. We are headed into a refi crunch like what we saw in the early 90s. Say it ain't so!
Posted by jeff | November 21, 2008 2:45 PM
I think it is so. Tell me what happen to the good ole days.
Posted by Oscar Thibidoux | November 21, 2008 5:04 PM