-- World central banks may have had to practically move the Earth, but the credit crunch's tightening grip finally loosened Tuesday.
Reopening for the first time since global central banks announced unprecedented steps to pump money into the financial system, the U.S. bond market thawed from its panic-stricken deep freeze. It had been closed Monday for Columbus Day.
And while few think the bond market will recover dramatically in days, weeks or even months, especially with the risk of a weaker economy looming, any improvement is welcome.
"We'd been pricing in Armageddon or a worldwide financial meltdown," says Bob Gahagan of American Century Investments. "We've possibly priced in the worst."
The disjointed nature of the bond market makes it difficult to pinpoint a single indicator of improvement. But the bond market's recovery was notable from the:
•Greater faith in financial institutions' health. The fact the government is plowing cash directly into the top financial institutions calmed investors. Concern about financial institutions' ability to pay their debts plunged 40% to levels not seen in more than a month, according to the CDR Counterparty Risk index. And banks were more willing to lend to one another, driving the rate on the London Interbank Offered Rate (LIBOR) for three-month loans in U.S. dollars down to 4.64% in the biggest drop since March 17. "All the stuff you want to see happening is happening," says William Dawson of Federated Investors.
•Rising comfort in lending money to corporate borrowers. The yield on debt issued by top-rated companies declined relative to U.S. government securities for the first time in nine sessions, says Merrill Lynch. Ingersoll Rand, an industrial supplier, said Tuesday it continues to tap the commercial paper market, a popular source of cash for highly rated companies. And overall, investors were willing to buy commercial paper that matures in 30 days at more reasonable rates than they were a week ago, says Kevin Giddis of Morgan Keegan.
•Cooling of mad dash into Treasury securities. Partially due to greater comfort with bonds beyond the safest Treasuries, the yield on the three-month bill rose to 0.30% from 0.21% Friday.
Still, few are saying the credit spigot is running free. "People don't want to get too excited," says Derrick Wulf of Dwight Asset Management.
Investors are bracing for a surge of new Treasury securities. That's another reason their prices, which move opposite yields, fell, Gahagan says.
And the economy, and companies' ability to repay debt, is only weakening, says Diane Vazza of Standard & Poor's. S&P Wednesday will report what it expects to be the corporate default rate in the next 12 months, which will be higher than S&P's already historically high current estimate of 4.9%.
"Everyone is looking for tangible signs every day" credit is improving, Vazza says. But, "it's going to be a long haul."