We have been watching the credit markets closely to see when signs of liquidity reappear. The Federal Reserve has dropped the Fed Funds rate to zero and the 10-year treasury is approaching 2%. Such low rates are intended to help unfreeze the credit markets. The stock market ended down about 1% today but there seemed to be more calm as the VIX fear index dropped below 50 after reaching heights above 80 not too long ago.
Mortgage rates are now quoted below 5% which should spur some more activity in the housing market. The home builders are still seeing weak sales but low rates are the medicine needed to get consumers to purchase homes and reduce this nation's unsold housing inventory.
As we have been saying for a while, the stock market cannot consistently move up until the loan market and corporate bond market show some life. Today marks such a moment. Macy's announced they were able to get a new credit agreement from their banks and so did Tyson Foods. The banks are garnering better terms for themselves but perhaps now they are beginning to show some willingness to commit capital to business lending.
As we perused the leveraged loan market today, we noticed a big rally. Loan prices rose and their yields dropped. The same phenomena occurred in the credit default swap market and in the high yield market. There was aggressive buying by investors today but much of it appeared to be a short covering rally. This could be the start of a credit rally which extends to the end of the year but until long term investors start committing their capital to these riskier assets, we will not be fully convinced that the credit crisis is truly thawing.
We believe today had many positive tea leaves and as stock investors become more comfortable with the improvement in the corporate credit markets, the bottoming process will end and the beginning of a new bull market can finally begin.
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