The Credit markets see gradual improvements
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hiThe government’s efforts to crank open the credit markets have led to some mild improvements in lending rates and Treasury bill yields. But it will probably take months, and perhaps a few years, before lending returns to healthier levels.
It was clear Tuesday that there is still plenty of fear in the lending business – one indicator, the difference between the rate at which banks lend to other banks and the rate at which they buy U.S. government debt remains near a 25-year high. But analysts believe that as long as conditions keep improving, the economy should be able to grow.
The problem is that the health of the economy and the credit markets is intertwined: The health of the economy relies on credit, and the willingness to lend depends on the economic outlook. As a result, the economy’s recovery might be jagged and gradual, as lenders incrementally loosen up as they grow more confident that borrowers are on steadier ground.
And, like an economic recovery, there’s no specific piece of data that will signal that things are significantly better in the credit markets. Rather, investors will need to see prolonged, steady improvement on various fronts – bank-to-bank lending, lending to businesses and consumers, and investment in corporate debt such as commercial paper – to get a sense that credit has returned to a healthier state.
Confidence in the lending business grew a bit Tuesday as the U.S. government said it would spend $250 billion of its $800 bailout plan on buying stock in nine major banks, after European governments announced a similar move Monday to recapitalize their own banks. The actions helped bank-to-bank lending rates tick lower, and bring some optimism back to the stock market.
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