Two Views Of The Credit Markets

It’s always interesting to look at the views people express of markets based on their vantage point. Case in point today is the testimony of Bernanke before the House committee and the thoughts of John Jansen who writes Across the Curve.

First Bernanke’s testimony seemed frank in that he cited improving conditions in the credit markets but also noted that there was still strain particularly with regard to credit spreads. Here is part of what he said:

The primary objective of these and other actions we have taken is to stabilize credit markets and to improve the access to credit of businesses and households. There are some signs that credit markets, while still quite strained, are improving. Interbank short-term funding rates have fallen notably since mid-October, and we are seeing greater stability in money market mutual funds and in the commercial paper market. Interest rates on higher-rated bonds issued by corporations and municipalities have fallen somewhat, and bond issuance for these entities rose a bit in recent weeks. The ongoing capital injections under the TARP are continuing to bring stability to the banking system and have reduced some of the pressure on banks to deleverage, two critical first steps toward restarting flows of new credit. However, overall, credit conditions are still far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards through October. There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks.

While admitting that there is still dysfunction, he seems to paint a picture of improving conditions. Reading it I would take away a sense that we seem to be moving in the right direction and that time seems to be working in our favor.

Now contrast it with some of Jansen’s comments today. Remember, Jansen is a former bond trader who appears to have a lot of daily input from his fellow colleagues on the front lines. So here is how it looks from the trenches:

The corporate bond market as measured by the IG 11 has begun to crumble. The index is currently quoted 226/228 which is about 19 basis points wider on the day.Why the sharp spike out in that spread today? I think it is partly a result of the significant widening in other spreads. I posted earlier about the subprime market and the CMBS market and the significant weakening in those sectors. It would be uncharacteristic for the corporate market not to follow suit.

There are other factors at work, too. The much heralded and universally acclaimed corporate child of that avuncular multi billionaire from the heartland Warren Buffet, Berkshire Hathaway, has seen some trouble in its CDS spreads. The company is AAA but the CDS is wrapped around 400 and is 25 wider today. That has caused a bit of angst (and probably some schadenfreud) among participants in the corporate bond market. It reminds me of a Latin phrase. Quis custodiet ipsos custodes? Loosely translated it means who shall guard the guards themselves. The ever vigilant market is watching Berkshire and apparently does not like what it sees.

I won’t print what he said about the CMBS market, except to note that the pullback on the use of further TARP funds has put it into a tailspin. I’ll leave a link to both of his posts at the end of this.

But, his comments about the corporate bond market and particularly about the views of some traders towards Berkshire Hathaway certainly doesn’t give me the same sort of relative comfort that I take from Bernanke’s comments. In fact, it leaves me with the impression that we may well be on as thin of ice as ever, with little being needed to push things if not over, than near the cliff.

I follow Across the Curve on a daily basis. I’m not a trader and have never been one, thus I tend to gloss over some of the more technical items he discusses. I do have a lot of respect, though, and learn a lot from the sense of market sentiment he captures. In the case of the somewhat disparate views of Jansen and Bernanke, I am inclined today to put more faith in what Jansen has to say.

Tom Lindmark

More:Across the Curve: Corporate Market, CMBS Market
Bernanke’s Statement

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