The above chart shows a historical view of the fed funds rate. As you can see the rate is at a record low. The fed funds rate is basically the rate at which banks lend overnight money to one another. It is also a primary tool that the Federal Reserve (Fed) uses to influence economic growth, the money supply, and inflation. Currently, the fed funds rate is at full throttle. However, we are all well aware the economic engine is still sputtering.
Data Source:
> U.S. Federal Reserve. H.15 Selected Interest Rates.
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The above charts show the spread in basis points between Aaa (highest rating) and Baa (low investment grade) rated corporate bonds. The first charts shows that the current spread is very wide relative to historical levels. The second charts shows a more detailed view of what has happened with this spread during the current economic crisis. The wider the spread the greater the perceived risk between high rated and lower rated corporate bonds. These charts provide a clear picture of the current stress in the corporate credit market. It also shows that investors are clearly concerned about increasing defaults on lower rated corporate debt.
Data Source:
> U.S. Federal Reserve. H.15 Selected Interest Rates. Moody’s yield on seasoned corporates. March 2009 data is for the first three weeks of the month.
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The above chart shows the spread between municipal bond yields and treasury bond yields. As you can see from the chart the spread is very elevated compared to historical levels. This is another sign of a flight to quality in bonds. Municipal bonds are usually seen as a very low risk investment. They usually yield only about 90% of treasuries. However, as of late March 2009, municipal bond yields were over 130% of treasuries. This is another clear sign that the current credit crisis is not over. It also shows that investors see an increased potential for municipal bond defaults.
Data source:
> U.S. Federal Reserve. H.15 Selected Interest Rates. Compares the 20-year treasury bond (constant marturity) with the Bond Buyers 20-year, general obligation, mixed quality municipal bond index.
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An historical view of the rate on a 30-year, fixed-rate conventional mortgage. As you can see it is at a record low level. What happens to the price of housing if mortgage rates head back up? Higher rates would make housing more expensive on a relative basis (putting more downward pressure on housing prices). It is obvious that the government is going to do all it can to keep mortgage rates down to prop up the housing market. Without record low mortgage rates housing prices would likely be much lower. For now low mortgage rates are propping up housing prices and providing homeowners with an excellent opportunity to refinance. However, there will be a large negative effect on home prices if/when mortgage rates begin to increase.
Data source:
> U.S. Federal Reserve. H.15 Selected Interest Rates. Primary Mortgage Market Survey - Feddie Mac.
The first chart shows the spread between the interest rate on lower quality (A2/P2 paper) and higher quality (AA) commercial paper. Commercial paper is an obligation issued by corporations and banks to finance short-term credit needs. The first chart clearly shows the dislocation in the commercial credit market from the ongoing credit crisis. A wider spread between lower quality and high quality commercial paper shows that investors see increased risk in this credit market. This spread has narrowed in recent months from its high, but remains at a very elevated level.
The second chart shows the spread between AA (high quality) non-financial and AA (high quality) financial commercial paper. This chart clearly shows the dislocation in the commercial credit market for financial corporations. Basically, financials with similar credit quality as non-financials have to offer higher interest rates to attract buyers of their paper. Historically this spread has been in the low single digits (almost even). However, it has widen substantially with the current credit crisis. Again, this spread has narrowed recently, but remains at an elevated level.
Both of these charts clearly show that the credit crisis is not over, and that risk and liquidity issues remain in the credit markets.
Data Source:
> U.S. Federal Reserve. H.15 Selected Interest Rates.
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The above chart shows the interest rate spread between the three-month Libor rate and the three-month Treasury bill rate (TED Spread). The Libor rate is the rate at which banks lend unsecured money to each other and reflects the credit risk of interbank lending. The Treasury bill on the other hand is believed to have extremely low risk. Therefore, the spread between the two (TED spread) is often used as an indictor of risk of default on interbank lending. An increase in the TED spread is a sign of more perceived risk in this market.
While off of its peak the TED spread remains elevated at over 100 basis points.
Data Source:
> U.S. Federal Reserve. H.15 Selected Interest Rates
> British Bankers’ Association
> Bloomberg.Com
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