CREDIT MARKETS IN GLOBAL SHAKE UP

Global credit markets are undergoing one of the most violent corrections in recent years as investors look to dodge problems in the US mortgage sector.
Investors are shedding riskier holdings such as debt issued by companies amid concerns about the number of firms caught up in the US sub-prime crisis.

This has seen a surge in the value of government-backed bonds and bills.

The situation is so bad that central banks have been forced to pump billions of dollars into the financial system.

On Tuesday, the Bank of England said it had loaned £314m to commercial banks for the first time in more than a month.

The European Central Bank, meanwhile, said that it was offering banks 275bn euros (£187bn) in cash over the next seven days.

Hunting havens

Despite these efforts, and other large market interventions by the US Federal Reserve and Japanese Central Bank, the unwillingness among investors to take on risk can be seen in the US government debt market.

There is still sense of caution in the air

Irvin Seah, DBS Bank

On Monday, the yield on the three-month US Treasury bill fell 66 basis points to 3.09%. It had earlier lost as much as 125 basis points, a bigger decline than even the one that followed the October 1987 market crash.

The tumble in yields signifies a surge in the price of US state-backed debt as investors look to buy assets that are regarded as the world's safest.

"Investors with risky assets in their portfolios are now rushing to liquidate positions and limit their losses," said Kosuke Hanao of HSBC in Tokyo.

The recent turmoil has been triggered by problems in the US sub-prime market, which specialises in lending to people with poor or no credit history.

Defaults on sub-prime loans have increased significantly, causing companies to revalue assets that were created by grouping large numbers of sub-prime loans together and then selling them on to other financial institutions.

Investors are now fearful of buying assets that will diminish in value, or increase their exposure to the sub-prime problems, and as a result are shedding assets such as company-backed debts, analysts said.

Threat to growth

This aversion to risk meant that Ottimo Funding, a company with the highest possible credit rating, was unable to sell $3bn worth of short-term debt, Bloomberg News reported on Tuesday.

While this may not sound significant by itself, it is worrying because companies and banks need to be able to turn to the credit markets in order to raise funds so that they can keep operating and running smoothly.

Analysts estimate that there is about 400bn euros of non-government debt due to be refinanced, and there is a risk that the companies involved will not find the buyers they need.

A lack of liquidity, where banks are unwilling to lend money or only do so at prohibitively expensive rates, can lead to a credit crunch that would see global economic growth slow and corporate profits shrink, analysts said.

German lender WestLB said late on Monday that it was difficult for German banks to get credit lines from their foreign partners.

"There is still sense of caution in the air," said Irvin Seah, an economist at DBS Bank in Singapore.

"If there is more bad news, what we saw last week is probably going to repeat itself. Most people think it will take another two months before things calm down."


SOURCE: BBC