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Have the Credit Markets Finally Healed?

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Last week, Fed chief Ben Bernanke declared a cautious victory in his ongoing battle to defend the world financial system from collapse. Yet while many investors remain skeptical about the state of the economy, one big accomplishment is hard to argue with: The once-frozen credit markets, while perhaps not functioning perfectly, have thawed considerably from their ravaged state last fall.

How far we've come
At the peak of the financial crisis late last year, it was clear that the credit markets were hardly functioning. Treasury bills traded at negative interest rates as investors refused any but the safest possible places to put their money. Even money market mutual funds, long seen as among the most secure short-term investments, were threatened by failures in the commercial paper market. They required temporary federal guarantees in order to prevent the modern-day equivalent of the bank runs of the 1930s.

Since then, many things have improved. Here are just a few signs of how much progress has been made in restoring the credit markets to normal operations.

Mortgages on the cheap
Arguably one of the biggest problems the economy still faces lies on the housing front. While prices may finally be stabilizing, many wary critics still point to option-ARM mortgages that may recast in the next few years, potentially creating a new wave of defaults and foreclosures that will push the economy back down.

While it's true that some homeowners simply can't afford to make anything above the extremely low payments they got during the initial phases of their mortgages, the lending environment is about as favorable as it can get. Long-term fixed mortgages remain near multi-decade lows. Meanwhile, the short-term rates upon which many adjustable-rate mortgages are based have stayed at rock-bottom levels, which will soften the impact of many impending rate resets.

Not every problem in the mortgage market has been solved, though. The Fed continues to prop up the ailing housing market by purchasing mortgage-backed securities. However, recent jumps in shares of Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) , the two largest recipients of government purchases, at least indicate there is some speculative interest that the mortgage market isn't a lost cause.

Corporate debt on the mend
In addition, companies have had much more success lately managing their own debt situations. The spreads between corporate bond yields and comparable Treasury yields have narrowed by more than half, from six-plus percentage points at the end of 2008 to just more than 2.5 percentage points recently. Moreover, junk bond spreads have also tightened, from a steep 22 percentage points in March to less than 9 percentage points now.

The volatility in corporate debt has given companies a chance to use a variety of strategies. Those looking to raise cash are now able to issue debt at more favorable rates.

Perhaps more interesting, though, is how many companies have taken the opportunity to buy back debt at relatively low prices. Here's a sample of some of the companies that have bought back debt this year:


Cash Used to Buyback Debt

Face Value of Debt Bought

Beazer Homes USA (NYSE: BZH  )

$58 million

$116 million

Tenet Healthcare (NYSE: THC  )

$60 million

$68 million

Hovnanian Enterprises (NYSE: HOV  )

$223 million

$578 million

Pulte Homes (NYSE: PHM  )

Not yet determined

$1.5 billion

Ford Motor (NYSE: F  )

$1 billion

$2.2 billion

Source: WSJ, Yahoo Finance.

By repurchasing debt now, companies take two positive steps. First, they take advantage of a rare opportunity to retire debt and improve their balance sheets at a big discount. But perhaps even more importantly, their willingness to spend cash signals a big shift in sentiment. For months, frozen credit markets have given cash-rich companies a big competitive advantage. Now, though, it's apparent that even companies that aren't in the best financial shape are willing to spend their money when they can reap a big windfall by doing so.

Not out of the woods
Unfortunately, the credit markets aren't likely to return to the boom nature of years past anytime soon. The Fed and other government intervention could be necessary for some time before things return to normal. With any luck, though, the days of wondering which big institution will be the next to topple are over.

Think financials like Citigroup will reap the benefits of cured credit markets? Morgan Housel believes you should think again before making that bet.

Fool contributor Dan Caplinger has already gotten everything he needs from the credit markets. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy probably can't heal you, but it's been trained to heel and roll over.

Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 26, 2009, at 5:08 PM, pedorrero wrote:

    Is the government out of the money-manipulation business? Heck no. If anything, the bailouts of the past year or more show an ever increasing tendency to meddle. Is money of gold or silver (as required by the Constitution?) Nope. So long term, the situation is likely to get worse. Sorry, but that's what history says. Also, I don't have the latest figures, but to reach long term (multi-decade) valuations, I think real estate still has another 40-50% to drop (from current "depressed" prices.) Low mortgage rates be damned.

  • Report this Comment On August 27, 2009, at 2:17 AM, thomdd1959 wrote:

    The only real financial crisis of the U.S.A. is hiding in the audit of “The Fed Scam”!

    We demand to know where our One point Two TRILLION DOLLARS is now!

    Alan Grayson (High Quality Version): Is Anyone Minding the Store at the Federal Reserve?

    Audit “The Fed Scam” bills HR 1207 must pass in The House and S 604 must pass in The Senate immediately! Any Representative or Senator that does not vote in favor of and support these bills or tries to “water-down” or stall these bills is clearly a Traitor and “Sold Out” the United States of America!

    “Few men have virtue to withstand the highest bidder.” --George Washington

    Does our government think that we are now here to serve them? Are they out of their minds?

    Some of our leaders today have acquired a very “twisted” view of their roles. Do we now have those who can no longer handle the power we entrusted them? Why have they abused and taken advantage of us? Do they no longer think they are accountable to us and believe they can do whatever they please? Our “public servants” have developed a “spirit of insubordination” and have gotten way out of control! This has to stop right now! This is ridiculous! If they do not want to listen to and serve us wholeheartedly, we no longer need them! “We need to do a major house cleaning immediately! Enough is Enough!

    It’s time for “We the People” of the U. S. A. to get VERY ANGRY!

    We need to keep a real close eye on all our government “public servant” employees. Our government was set up to serve U.S. and we no longer want any secrets about our money. We no longer want any misguided governmental arrogance directed at us!

    This Is A Very Public Matter!

    We demand real transparency, with open books and plenty of civilian watchdog czars. Government czars are an insult to the intelligence of the American people! Many of are entrusted government employees are a total disgrace to U.S. They only care about their own best interests!

    The most conniving, low life, manipulators in all of history put “The “Fed Scam” together! Since its inception in 1913, “The Fed Scam” has helped to devalue our dollar by 95%. During the recent economic crisis, it has poured TRILLIONS of dollars into the economy with no oversight, has made secret agreements with foreign banks and governments, and has refused to tell Congress or the American Public who is getting our money. They have the power to print it, but it is not their money! This is our money! They are blood-sucking thieves!

    End “The Fed Scam” Now! We must never again allow private banks to create or control our money! Why should we pay interest on our money! We must never again allow our “public servants”, to keep any secrets about our money! Our big mistake was to trust our government. They can not be trusted! History has taught us this, over and over again. We have been warned over and over again. Why do you think we have so many economic problems now?

    “Congress can revoke central bank’s charter ‘at any time’” --Ron Paul

    Anybody who supports “The Fed Scam” is clearly a Traitor to “We the People” of the United States of America!

    “We can all commiserate forever about how bad things have been, are, and will continue to be. But I don’t think that we can afford to wait for elections in order to have our say about putting a stop to this madness. Enough, already! Let’s start talking treason, prison, and death penalties for all malefactors in government who subvert, ignore, skirt and otherwise trash the Constitution of these United States of America. Those who have sworn to uphold the Constitution and have then ignored their oaths of office are guilty of perjury and malfeasance in office.” –Stephen A. Langford (personal communication to this author)

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