Rates are falling, but corporate spreads are widening



Credit conditions ease, but mortgage credit is tight

In the FOMC’s (Federal Open Market Committee) review of the financial situation, the Fed discusses the state of the credit markets and the interbank market. The Fed gets rough data on Treasury trading from primary dealers through its Desk Survey. Primary dealers trade Treasuries in the primary market. This means they trade directly with the Fed. This is a lucrative business, but it also means they sometimes must transact with the Fed even when they don’t want to.

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Credit conditions

Credit conditions are discussed in the section that reviews the financial situation. The Fed noted that during the October through December intermeeting period, long-term interest rates fell and corporate spreads widened. This widening was probably most evident in the energy sector where distressed hedge funds are finding opportunities.

On the banking side, corporate real estate financing remained available, and commercial and industrial lending continued to expand briskly. As noted in the review of the economic situation, the economy continues to expand, which is good news for the credit markets.

That said, gross bond issuance by corporations was strong, and credit was generally available. However, mortgage credit remained tight. Mortgage credit has been depressed due to regulatory pressure and an overall lack of activity in the housing markets.

Overall, the credit markets are functioning well. Corporations and households are able to access the credit markets. So far, it looks like the widening corporate spread is being felt mainly in the energy patch, not overall. Credit spreads, or the risk associated with lending, is extremely important for commercial REITs such as Simon Property Group (SPG), Boston Properties (BXP), Kilroy Realty (KRC), Vornado Realty (VNO), and SL Green Realty (SLG). As spreads change, the cost of funding their balance sheets changes, which influences earnings yields and ultimately dividends.


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