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Credit market recovery slips on carmaker fears
2008-11-20
NEW YORK - Investors flooded into government debt again on Thursday, sending Treasury yields to multiyear lows as ongoing worries about an auto industry collapse impede the credit markets' attempts at a recovery. Meanwhile, rates on junk bonds keep soaring -- a bad sign for speculative-grade companies that need to tap the markets for funding. "Every time we feel like we've turned a corner, we run into another wall," said Kevin Giddis, managing director of fixed income at Morgan Keegan, noting that while the credit markets may be functioning better than they were in September, investors are no more willing to take on risk. "It's pretty ugly." The yield on the benchmark 10-year Treasury note sank to 3.22 percent -- the lowest level since June 2003. The 30-year bond's yield fell to 3.79 percent -- the lowest since the government started issuing the bond in 1977. And the 2-year note's yield sank to 1.01 percent -- the lowest since 1946, according to Global Financial Data in Los Angeles. Treasury bills yielded the lowest amounts since immediately following Lehman Brothers Holdings Inc.'s bankruptcy in September. The yield on the three-month T-bill dipped to 0.04 percent from 0.06 percent -- a sign that investors are willing to earn minimal interest as long as the security is safe. On Thursday, a bipartisan group of auto-state senators reached a compromise to give Detroit's Big Three automakers a government lifeline worth billions. Still, the plan faces a reluctant Senate. The fear in the market is that the failure of an automaker would further weaken the already struggling economy. New claims for unemployment benefits jumped last week to a 16-year high, the Labor Department said Thursday -- that figure would likely soar even higher if an automaker such as General Motors Corp. could no longer employ its workers. To be sure, many corners of the credit markets remain healthier now than they were between mid-September and early October. Bank-to-bank lending rates fell modestly Thursday for the second straight day, a sign of willingness to lend among financial institutions. The London Interbank Offered Rate, or Libor, on three-month loans in dollars fell to 2.15 percent from 2.17 percent Wednesday. And the commercial paper market is seeing more trading activity after the Federal Reserve started offering to buy highly rated companies' paper. Commercial paper is short-term debt that companies sell to finance their day-to-day operations. The commercial paper market increased in the week ended Wednesday for the fourth straight week; the Fed said that total commercial paper outstanding rose by $11.1 billion to $1.61 trillion. "The flows there are as normal as they've been in months," Giddis said. "That's certainly a success since the Lehman situation." But while short-term funding efforts are being boosted by the Fed, most companies are unable to raise long-term funding through the markets because the rates have gotten prohibitively high. Standard & Poor's on Thursday reported that its speculative grade composite spread -- which measures junk bond rates compared to Treasury yields -- set a new five-year record on Thursday for the fourth straight day. "With speculative-grade defaults on the rise, higher preponderance of credit downgrades, and a general malaise about the futures of the economy, we expect spreads to remain at their elevated levels for some time until confidence is restored to the market," wrote Diane Vazza, head of global fixed income research at S&P, on Thursday.
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