Bulls Hack Out of a Thicket

As Diamond says, "it is like feeding an addict."

In a rising-inflation environment with a robust job market, more liquidity in the form of a rate cut could make inflation not just sticky, but virulent.

Indeed, it is still hard to argue that the 17 consecutive fed funds-rate hikes that brought the overnight borrowing rate to 5.25% have done much to curb risk appetite or to tighten lending standards anywhere but the housing market.

Housing-related stocks got a reprieve Thursday as Bear Stearns (BSC Quote) became the latest broker to downplay its exposure to subprime and say it sees opportunity amid the recent carnage. Those comments helped push shares of Accredited Home Lenders (LEND Quote) and Novastar Financial (NFI Quote) sharply higher, while homebuilders rallied despite some downbeat comments from Toll Brothers (TOL Quote) CEO Robert Toll, who called the spring selling season "a bust," Bloomberg reports.

Meanwhile, banks that pulled the financing plug on subprime lending institutions have just replaced the high-yielding borrower with other suckers ... err, clientele. Bank credit facilities to high-yield, or speculative-grade, companies hit a record high in February and are on track to better the record by the end of March, says Lonski.

In concert, high-yield bond spreads, or risk premiums have only modestly widened in the market's recent turmoil. The average junk bond's risk premium, about 320 basis points over comparable Treasury bonds, is wider than recent lows around 250 basis points. But the 320 average remains well under the average risk premium in the best parts of recent economic expansions, says Lonski. Risk premiums in the most recent 1993-97 credit-cycle upturn averaged 387 basis points.