Tuesday, August 26, 2008

Bond market flashes yellow and red lights

Feeling fatigue of keep reading credit crisis news for non-stop of more than 1 year but unfortunately still can't let my guard down yet. Many will argue that the Fed constantly dropping the interest rate will eventually revive the economy.

Unfortunately the real world does not agree with the simple theoretical falling interest rate leading to economy recovery. The actual credit costs are going up based on above charts. Higher lending costs unlikely to benefits consumers and businesses. Therefore, unlikely to revive the economy as fast many wish.


(WSJ)Broadly speaking, spreads lately have been at their widest since Bear Stearns was rescued in March, and in some cases at their widest in a decade.

Investors worry about widening spreads for two reasons. First, they reflect a lack of trust in the financial system -- a fear about borrowers' ability to repay. Spreads involving interbank loans suggest that banks sometimes even are nervous about lending to one another.

Second, higher spreads typically mean higher borrowing costs for businesses and consumers, potentially damaging earnings. That makes economic recovery harder. A recently released Federal Reserve survey of big banks reported that banks have "tightened their lending standards and terms on all major loan categories over the previous three months."

"We view higher spreads as a sign of stress in the financial markets, and we are worried about that," Mr. Kattar said. He and others worry that more banks, mortgage investors and brokerage firms might need government support in order to survive.

On top of that, applications from people seeking new mortgages have continued to fall, suggesting that the consumers are still pulling back.

So, I don't think the US market can continue to rally until credit markets stabilize.

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