Saturday, Feb. 07, 2009

Interest Rate Spreads

Modest signs have begun to emerge suggesting that the credit freeze is thawing. But borrowing rates remain way out of whack. Consider the difference between the 10-year Treasury bond, currently yielding around 3%, and a typical 10-year corporate bond now yielding around 7%. That spread of 4 percentage points has narrowed from 6 percentage points in recent weeks but still is double what's typical. Historically wide credit spreads between securities that tend to track closely suggests that borrowers — other than the U.S. government, anyway — are having great difficulty getting funds. When credit spreads across the spectrum narrow it will signal that money is flowing again, a critical development. But Richard DeKaser, chief economist at National City Corp., says not to get too excited until spreads narrow substantially. Even a 4-percentage point spread in the bond yields just mentioned is a level typical of recessions. He'll exhale when we get back to a 2-point difference. Also, and perhaps easiest to follow, look for jumbo mortgages which are now about 1.5 percentage points above conforming mortgages to close to within half a point.

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