Raising Capital Becoming Increasingly Difficult
Investors are demanding an increasingly higher premium over Treasury yields as spreads on investment grade bonds have widened recently. If spreads stay this wide, it will be more expensive for many corporate and government entities to raise capital through bond issues.
The gap climbed 3 basis points to a record 311 basis points today, according to Merrill Lynch & Co.’s U.S. Corporate Master index. It was the third time the spread reached a new high this week, surpassing the gap of 305 basis points set March 20, just after the government brokered a takeover of Bear Stearns Cos.
During the current credit crisis financial firms have scrambled to raise hundreds of billions of dollars in capital to cope with the half a trillion in writedowns they’ve taken since last fall. The continuing weakness in credit and housing markets have many investors predicting that the Fed will keep interest rates at 2% at least until the end of the year.
You have some analysts saying the housing slump could continue well into 2010 if not longer. Home prices are expected to fall another 15%-20% before it’s all said and done.
Right now the problems in both sectors are feeding off each other. Defaults and foreclosures are causing more writedowns, while weak credit conditions have caused mortgage rates to rise and is making it difficult for prospective home buyers to enter the market.
Just last week American Express issued 5-year notes at close to junk bond levels despite it’s relatively high credit rating. You’re seeing spreads rise this high because realistically no one know how close we are to the actual bottom.
