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.
================================================================================