Interesting read:
Credit spreads, money signal bounce
U.S. businesses still able to secure funds for growth
By Rachel Koning, CBS.MarketWatch.com
Last Update: 5:19 PM ET Feb 2, 2001 NewsWatch
WASHINGTON (CBS.MW) - Layoffs and consumer confidence are headline prognosticators of U.S. growth
prospects. But lower-rung data such as corporate credit spreads and the nation's money supply offer a valuable, if less flashy, snapshot of the business outlook.
And currently, these barometers bode well for a U.S. recovery, say some economists.
Narrow yield spreads in the corporate debt market signal that companies have been able to secure funds relatively easily and at lower interest rates.
The Federal Reserve's surprise half-point interest-rate cut in early January - only to be followed with another
half-point reduction this week - fired up corporate bond issuance to record one-month levels.
Companies offering investment grade - the highest quality credit ratings - higher yielding "junk" bonds or a
combination sold nearly $86 billion in debt last month to restructure current borrowing or grow their businesses.
And investors came out en masse for the still higher-yielding paper that outshines the safer government debt sector in a falling interest-rate environment.
Despite heavy competition, the yield spreads between corporates and Treasurys narrowed, reflective of demand. Since yield moves inversely to price, lower prices forced by more supply could typically widen the spreads to Treasurys and cost the companies more to issue debt or keep them out of the market altogether.
No credit crunch problem
The flurry of business last month sends a signal to credit-wary Fed chief Alan Greenspan that so far, no credit
crunch is to be found. A tightening of the lending reins often accompanies an economic slowdown and typically
exacerbates the problem.
Tony Crescenzi, fixed-income analyst with Miller, Tabak & Co. still expects the Fed to lower interest rates some more, but he sees evidence outside of and including the big economic numbers that will allow the central bank to wait until its March 20 policy meeting. Even then, Greenspan and his colleagues may not have to deliver the third half-point rate cut in a row, but can opt for a gentler quarter-point reduction.
Crescenzi lists his reasons: record corporate bond issuance in January; sharply compressed yield spreads between low-grade corporates and Treasurys; a 10-percent annualized gain in [commercial and industrial] loans in January; a 21-percent annual rate of increase in M3 [money supply] over the past eight weeks; and the recouping of over $1 trillion of lost stock market wealth.
At the consumer level, he lists both a resilient housing market and early evidence that post-holiday shopping made a healthy recovery.
"All this before the impact of the Fed's rate cuts have taken hold and before the tax cuts find their way into
consumers' pockets. If it walks like a recovery and looks like one, it must be one," Crescenzi said.
Moody's senior economist John Lonski also points to "record smashing" corporate bond issuance, increased bank lending and the lowest borrowing costs since the second quarter of 1999, which taken with a flurry of mortgage applications, will help deepen financial liquidity as 2001 stretches on.
"The latest re-acceleration of the M2 monetary aggregate hints of a re-acceleration of nominal gross domestic
product by 2001's third quarter," Lonski wrote in a recent research report.
M2, the most widely followed measure of money supply, includes all currency held by consumers and businesses for spending, checking and savings accounts, travelers checks, and private holdings in money market funds. M3 includes all these forms but adds jumbo certificates of deposit and other large one-time deposits topping $100,000.
Read more on money supply on the Fed's Web site.
Chris Rupkey, senior financial economist with the Bank of Tokyo-Mitsubishi, agreed cautiously that credit spreads and money supply growth are bright spots to be taken seriously.
But he argued that most economists consider money supply a simple measure of opportunity costs and not a signal for the Fed.
As for the flurry of debt issuance, the havoc wreaked on the short-term paper market from struggling California
utilities that defaulted on payments prompted many investors and issuers to move up the maturity range and wade into the note market instead, Rupkey said.
But he agreed with the others: "We're far from a credit crunch. There is money available." |
