Monday, October 27, 2008
Interbank markets slowly recover
I get a lot of mailing list emails that purport to keep me abreast on the latest in financial news. This one, which arrived this evening from the capital markets desk of a major investment bank, was more than usually lucid on a number of subjects:
It is hard (even in a performing countercyclical industry) to trade up when the average High Yield bond has gapped wider by almost 25bps per day. The pressures on the debt and equity markets are just too great. There is still significant delevering, continued forced redemptions by faltering hedge funds, and the economic effects of the "credit crisis" are opaque at best. In fact, there isn't much information value in looking at secondary trading levels of High Yield Bonds or Loans, given this pressure, as there is no fundamental reason why the average Term Loan should be trading below historical recovery rates. The market is going to have trouble trading tighter until the higher quality end of the spectrum improves and the interbank market (the "pipes" of the system) get unclogged.
There is a pretty simple and concise summary of risk measures that can be readily observed that highlight where the interbank market is on a daily basis. One of the most easily observed measures (and easiest to understand) is the TED Spread. It is the interest cost banks pay when borrowing from each other, less the borrowing cost the US Government pays for the same time period. The Economist had a good quick (2 minute) video description of what this measure is and why it matters (link provided here) [embed below added].
As a point of reference, for the two and a half years before the credit crunch began the TED Spread barely moved, and averaged 42bps. During the second half of 2007, the TED spread jumped to 127bps and peaked at 464bps right before the US government announced it plan to take equity stakes in Banks in early October. The good news is that this level has decreased precipitously to 275bps today. The TED Spread has largely traded sideways for the last week, but 3 month LIBOR has continued to decline in this period.
So, despite the Dow making a new cycle low today, and the High Yield market continuing to make new wides, the interbank market is improving, which is a necessary step to getting the debt markets back open to help performing Healthcare companies get access to new funding at rational rates.
The credit markets were, by the way, the main subject of Saturday's episode of "TigerHawk TV," which you might find especially illuminating after having read this post.
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