THE BASIS POINT

Credit Crunch Easing?

Below is from Teodoro Wealth Report, a weekly produced by Marin County-based financial advisor Alex Teodoro:

One key to an economic recovery is a thawing of the credit freeze. Let’s look at three indicators that suggest we’re making some progress in this area.

First, the LIBOR is coming down. LIBOR stands for London InterBank Offered Rate and it is the interest rate that banks charge to borrow from each other. A high rate indicates banks are nervous about getting repaid while a low rate suggests banks are confident they’ll get repaid. The 3-month LIBOR peaked at 4.82%n October 10, 2008 in the throes of the credit crisis. Last Friday, it closed at 0.66%, according to Bloomberg. This dramatic drop is a good sign that banks no longer fear a collapse of the international banking system.

Second, the 3-month TED Spread is coming down, too. This is the difference between 3-month LIBOR and the 3-month Treasury bill rate. A large spread suggests investors are concerned about default risk while a small spread suggests investors are less concerned. The TED Spread peaked at 4.65% on October 10, 2008 and closed last Friday at 0.48%, according to CNBC.

Third, junk bond yields have come down significantly in recent months. The Merrill Lynch High Yield Constrained index, which limits individual issuer concentration to 2%, yielded 14.4% last Friday, according to The Wall Street Journal. While that is still high, it’s a big decline from its peak yield of 22.5% in the past 12 months.

Other areas of the credit market, such as consumer credit, business credit, and the mortgage market, have shown improvement, but they are still a bit tight. Overall, credit is flowing and interest rates are generally low, so the credit environment is constructive, but there is still room for improvement.