Sunday, April 12, 2009

Corporate spreads still seriously elevated; investment to suffer

I hadn't looked at corporate spreads in a while - the firm's borrowing costs relative to the government's borrowing costs. Recently, the government's cost of borrowing for a term of 10 years, the 10-yr Treasury rate, decreased with the Fed's efforts to buy longer-term Treasuries. And the reason that the Fed is buying Treasuries is to lower borrowing costs faced by firms and households (corporate rates, mortgages, auto loans, etc.), which has evidently helped...

...but corporate spreads are still very, very elevated.

The chart lists the 10-yr Aaa and Baa yields over the likewise Treasury rate (the corporate spread) in basis points (bps, essentially rate*100) reported by the Federal Reserve. Corporate spreads surged in March 2008 when the Fed lent money to JPMorgan in order to facilitate the takeover of Bear Stearns. That was a year ago; and since then, credit spreads have risen to record highs and then ebbed only slightly.

And this (chart below) is no coincidence.

The chart illustrates the contribution to growth from firm investment in equipment and software, hitting -2.18% in Q4 2008. Capital investment is retrenching; and until borrowing costs fall much more sharply, investment will remain meager.

Rebecca Wilder

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