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Why credit conditions ease, but mortgage credit is still tight



Credit conditions ease, but mortgage credit is tight

Overall, the financial situation didn’t change materially between the April and June Federal Open Market Committee (or FOMC) meetings. The Fed gets rough data on Treasury trading from primary dealers through its Desk Survey.

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Primary dealers trade Treasuries in the primary market. This means that they trade directly with the Fed. This is a lucrative business.

The U.S. dollar rallied during the inter-meeting period, based on global instability and weakness in overseas economies, particularly Europe. Most commodities are denominated in dollars, which has the effect of pushing down inflation, but also hurting exports and thus corporate profitability.

The yield on the 10-year increased by about 15 basis points, which the Fed attributed to its own communications with the market. Yields on Treasury Inflation Protected Securities (or TIPS) also fell during the inter-meeting period, reflecting a stronger dollar and weaker oil prices.


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On the household front, the Fed noted that the mortgage market remains tight. However, signs of easing are starting to pop up as home price appreciation continues. Credit spreads in the mortgage market tightened, but applications are way down. Ex-Federal Reserve Chairman Ben Bernanke said even he was having difficulty refinancing his mortgage.

In the consumer market, conditions were strong. Credit card balances increased, auto loans picked up, and issuance of credit-card-backed and auto-backed securities was strong.

Conditions for commercial real estate loans improved during the quarter. Also, gross issuance of investment and speculative-grade debt was fast.

So, the credit markets are functioning well. Corporations and households are able to access the credit markets. Increased credit availability is extremely important for commercial real estate investment trusts (or REITs) like Simon Property Group (SPG), Boston Properties (BXP), Kilroy (KRC), Vornado (VNO), and S.L. Green (SLG).


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