Commercial Paper is trading again.
In this blog, we highlight and decipher this week's leading indicators from the credit markets.
The spread needs to drop below 0.5% (50 basis points) to really signal a healthy banking credit market, but we are sure getting close. And a lot closer than we thought possible just a few weeks ago. Volatility is the only thing that seems to be predictable right now.
Take a look at the chart below, which shows 12 months of the TED Spread and you can see for yourself.
TED SPREAD - LAST 12 MONTHS
HOW DID IT HAPPEN?
In late 2008, Central Banks across the World were collaborating to end the crisis. They were slashing interest rates and lending cash at an unprecedented rate. And it worked!
That is not to say the credit crisis is over for good. And just because the banks are lending to each other doesn't mean they are lending to companies. There's no guarantee credit markets won't freeze up again, but it's certainly a very healthy sign.
Commercial Paper is trading at the highest volumes since Lehman Brother collapsed in September.
Investors are snapping up new corporate bonds at the fastest pace since May, driving down yields from record highs once they begin to trade.
Just this week, some companies are starting to take advantage while the good times last, most notable of which is McDonald's, the world's biggest restaurant company, which raised $750 million in 10-year and 30-year bonds this week.
In 2009, rising confidence in corporate bonds may help many companies that need to replace $135 billion of debt this year in the U.S.
We certainly need this increased confidence. Commercial lending to businesses has a lead time of many months and any increased confidence in corporate bonds will take time to trickle down to middle market companies.
Business owners may not witness the effects until late 2009, but at least there is something to look forward to.
OUT OF THE WOODS?
A normal TED Spread number would be around 0.25% (25 basis points), so at 0.98%, we're still 4 times higher than normal.
The rate on three-month Treasury bills was 0.06% (6 basis points) on Monday. One year ago, three-month Treasury bills were 3.16% (316 basis points).
Banks are still wary of lending to each other. Financial institutions held more than 300 BILLION euros ($400 billion) in overnight deposits yesterday with the European Central Bank. The daily average in the first eight months of 2008 was 427 MILLION euros.
Let's take time to digest that number. This weeks, banks in Europe were holding almost 1,000 times as much money overnight with the European Central Bank than they were this time last year. They want to sleep soundly at night. Better lower overnight rates than waking up with the bank you lent to last night in default.
So, here's the $350 billion question. What should our President-Elect do with the other half of the TARP dollars. Does he need to do anything with it at all?
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.
M&A includes buyer and seller representation for companies with $2 million to $25 million in EBITDA and $10 million to $500 million in revenues.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.
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