Fed rate cut or not, the credit crunch is not yet history.

That’s not to say that firms with solid credit ratings won’t be able to access the bond market.

But firms with more speculative ratings must be prepared to continue paying wide spreads over Treasury debt to compensate investors for taking the plunge. And even solidly rated ones may have to wait before reaping the full reward.

At least one influential group, Standard & Poor’s, is starting to become more optimistic about the funding environment in general.

Shortly after the Fed announced its rate- cutting surprise, the rating agency predicted that investment-grade debt will firm up prior to the next Federal Open Market Committee meeting scheduled for the end of this month. This pronouncement came just one day after S&P had predicted spreads on corporate debt to continue at their wide levels or widen further before they stabilize later this year.

But, right now banks are still skittish about issuing commercial paper.

Meanwhile, there is still skepticism about corporate debt, whether investment grade or junk. As a result, companies looking to come to the capital markets will have to pay high rates in relation to Treasuries, at least until the next Fed easing.

However, Diane Vazza, managing director and head of global fixed income research for S&P is much more optimistic about the state of the capital markets now that the Fed has begun to cut interest rates.

On Jan. 2, the day before the Fed’s move, she said, “Despite a widely anticipated Fed rate cut early in the year, investment-grade spreads will remain at wider levels in the first half of the year. With more defaults on the way, speculative grade spreads will widen further before they firm in the first half of the year.”

Market Spooked by Defaults, Supply Nevertheless, several hours after the Fed’s decision, Vazza said the agency saw a brighter short-term outlook for investment grade debt.

“We expected we were going to see half a [percentage] point [easing] at the regular January meeting. Now we think we’ll see another quarter point in January,” she said. By the end of the year, she expects rates to come down by 1.5 percentage points.

At this point, according to Vazza, with the typical investment-grade bond yielding 254 basis points more than Treasuries, there is likely to be some “firming” between now and Jan. 30, when the FOMC meets. Any improvement in these yields in relation to Treasuries would have to come after that, she adds.

In addition, she says, while “there’s a pipeline and it’s filling up,” any huge upswing in investment-grade corporate supply is still far away and not likely to derail any “firming,” for now.

For junk, any improvement will have to wait until there is another Fed easing, which could come as late as March when the FOMC meets.

On the other hand, others are concerned that an increase in supply will tend to hurt the performance of even investment-grade debt, at least over the short haul.

This month will see a lower volume of debt mature than the projected average for 2001, says David Finklestein, director of fixed income research at the Williams Capital Group. Finklestein, looking at the second half of last year, noted that spreads widened each month in which new issues outpaced scheduled maturities.

Meanwhile, corporate issuers are expected back in the market in a big way this month, driven in part by low yield levels.

Also, banks facing shrinking margins on commercial paper and increasing defaults, are “shutting the spigot” in some cases.

“Given what’s happening in the banking industry, many firms are saying ‘we better issue plain vanilla term debt bonds of, say, two-year maturities,'” Finkelstein adds.

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