Strong opinions, weakly held

Evidence that we should freak out, episode II

Here’s more confirmation that the inability or unwillingness of people to lend money to one another is what’s driving the ongoing bad news in the financial markets. It is essentially twice as expensive for IBM to borrow money this year than it was last year:

IBM raised $4 billion today with the sale of 5 year, 10 year and 30 year bonds. I will relate the story of the bond in the 10 year sector.

I shall begin with the IBM bond which matures in 2017, which is one year shy of the bond that the company offered today. It is not exactly the same but we can compare. That bond traded one month ago at a spread of about 170 basis points to the 10 year Treasury. Yesterday, a salesman with whom I converse, (and friend of the blog) sold some to a customer of his at T+265 basis points.

Today when IBM offers the new 10 year bond the market forced that gilt edged untainted by the credit crisis technology company to pay T+388 basis points. It was over 120 basis points cheaper than a comparable bond traded yesterday. That is a sign to me that the credit markets are in the direst state and that funding is drying up for corporate America.

As the author points out, if it’s this difficult for IBM to sell debt, most other companies are effectively shut out of the credit market entirely.


  1. And yet that’s like a 7-8% rate. It’s not impossible to borrow at that rate and still make money from whatever you’re funding. It’s just more expensive.

    I’m not saying everything’s fine. I’m just saying that the sky hasn’t fallen yet.

  2. I worry more about companies who cannot get credit at all.

  3. Yes – it’s not that the costs are unmanageable, it’s just that a lot places are frozen: that translates into orders not being placed, bills not being paid, etc. If that lasts for too much longer, the sky really will fall because companies are going to have trouble making payroll and everyone is going to stop spending anything which they don’t have to.

    I’m fortunate to be employed by a well-funded university but I have friends who work as independent web developers. One scary bit of news is that work is really hard to find at the moment: not because clients aren’t interested but simply because there’s a lot of wait-and-see going on, which isn’t sustainable when you still have to pay the rent.

  4. Some evidence that we shouldn’t:

    1) University of Chicago Economist Casey Mulligan’s Op-Ed in the NY Times, arguing that this is a banking crisis, and banks are isolated from the rest of the economy (albeit counterintuitively and counter to the examples given on rc3 so far).

    2) The markets are beginning to show some resistance to lower movement.

    3) “The $150 oil shock… worsened the credit crunch… But now oil is about $80 a barrel. When the dust finally clears, lower energy prices will be an important tax-cut, pro-recovery factor. Meanwhile, the exchange value of the U.S. dollar is up 16 percent in recent months. That’s an anti-inflationary sign of confidence.” – Lawrence Kudlow

Leave a Reply

Your email address will not be published.


© 2023 rc3.org

Theme by Anders NorenUp ↑