The credit markets are still under considerable pressure, though investor confidence in corporate debt seems to be on the rebound. Over the past week, the Federal Reserve made another attempt at reviving confidence among borrowers and lenders to thaw the credit freeze. On the back of the announced TSLF plan and 75bp rate cut, policy makers offered their first $50 billion liquidity injection into the market and expanded the range of acceptable collateral for the auctions. In addition to AAA rated commercial mortgages, the Fed has said it will now accept bundled mortgage debt (what many consider to be the bane of the credit market). However, while risk premium in insuring corporate debt has eased on these efforts; demand for short-term, comparatively risk free paper has yet to respond significantly.
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Credit Market Last Week Current Change % Change Outlook * DJ Credit Default Swaps 160.9067 130.9688 -29.9379 -18.61% Improving 10 Year Junk-Bond Spread 658 663 4.921 0.75% Deteriorating Credit Card Delinquencies 4.09 4.11 0.02 0.02% Deteriorating Mortgage Delinquencies 5.59 5.82 0.23 0.23% Deteriorating Stock Market Last Week Current Change % Change Outlook Dow Jones Industrial Average 11972.25 12532.6 560.35 4.68% Improving Dow Jones Real Estate Index 238.79 264.89 26.1 10.93% Improving Dow Jones Financial Index 467.26 540.64 73.38 15.70% Improving Dow Jones Retail Index 98.31 109.17 10.86 11.05% Improving S&P Volatility 32.24 25.72 -6.52 -6.52% Improving Economic Indicators Previous Current Change % Change Outlook Mortgage Applications -22.6 48.1 70.7 70.70% Improving Existing Home Sales 4.89 5.03 0.14 2.86% Improving Personal Spending 0.3 0.4 0.1 0.10% Improving Personal Income 0.5 0.3 -0.2 -0.20% Deteriorating PCE 3.6 3.7 0.1 0.10% Improving Initial Jobless Claims 358 378 20 5.59% Improving Improving outlook means the Federal Reserve could use this indicator to
support a rate hike. The opposite stands for a deteriorating outlook.
CREDIT MARKET: HOW IS IT DOING?
A DEEPER LOOK INTO THE CHANGES THIS WEEK:
The announcement that the Fed would accept a broader range of assets as collateral for its regular auctions played a significant role in restoring confidence in firms that were holding considerable sums of debt that is still difficult to price in the market. In response to this, the cost of default swaps plunged nearly 20%. At the same time, the market realized this modification wouldn’t secure all corporate debt, leaving risk premiums to grow even higher.
Demand for short-term paper cooled somewhat last week in response to the Fed’s assurances on liquidity, though rates on money market instruments have yet to rebound. The risk-free T-bill rate slipped to its lowest level since 1954 through last Friday, while the three-month Libor slipped to a new three-year low. The Fed will no doubt monitor rates on these instruments to gauge the effectiveness of their efforts in the weeks ahead.
STOCK MARKET: HOW IS IT DOING?
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A DEEPER LOOK INTO THE CHANGES THIS WEEK:
U.S. CONSUMER: HOW ARE THEY DOING?
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A DEEPER LOOK INTO THE CHANGES THIS WEEK:
Written by John Kicklighter, Currency Analyst for DailyFX.com
To contact John about this or other articles he has authored, you can email him at <[email protected]>