Credit Market Closing Notes

Indicators on the credit market continue to show strain, and there will probably be no significant thawing of the credit freeze until it is clear that Congress is going to pass a financial stabilization bill.

Near-month eurodollar futures contracts, which are closely tied to the London interbank offered rate, remained at lofty levels, indicating that Friday's Libor fixing will again be at elevated levels. The nearest month, October, saw an increase of 23.5 basis points on the day. The November contract increased 16 basis points. This means that Libor's spread to fed funds will likely be at a new record. (The spread between three-month Libor and fed funds reached 2.2 percentage points today, a record high that surpassed the Oct. 20, 1987, high of 206 basis points).

T-bill rates were mixed but remained extremely low, suggesting that money continues to flow into Treasuries from riskier assets. The one-month rate increased but remained paltry at 0.68%. The increase was 48 basis points, which is mildly encouraging. The yield on three-month bills fell 20 basis points to 0.59%, and the yield on six-month bills fell 25 basis points to 1.15%.

The two-year swap rate, a gauge of expectations about credit spreads, increased by 8.5 basis points to 164.75 basis points over two-year Treasuries. The spread is not above last week's high of 163.75 basis points, which was the highest in at least 20 years. A more normal reading would be closer to 50 basis points.

In the corporate bond market, no securities were sold today. Corporate bond issuance has been a paltry $7 billion or so over the past three weeks, far fewer than the $60 billion that would normally be sold.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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