Wednesday, September 24, 2008

More/More Credit Lockup?

OK, so the country's largest Chevy dealer goes down.

A few thousand employees out of work, and GM has a helluvalotta inventory that they didn't expect to have. It's meaningful, but not the end of the world as we know it, right?

That's not all.

In early August Caterpillar brought a 5 year bond to market, the 4.90 of August 2013. That bond priced 175 basis points cheap to the benchmark 5 year Treasury note. With the turmoil in the credit markets the last several weeks, the issue has widened on spread and this morning it was quoted 225/ 210.

The talk on the new issue is T + 325 basis points. That is fully 100 basis points cheap to the outstanding issue and 150 basis points above where the same maturity was priced six weeks ago.

CAT, for crying out loud.

But that's not all:

.American Honda (the finance arm of the car company) just issued 5 and 10 year bonds similar to Catapiller. They are rated AA, and the offering went off at 400 over [Meaning that AmerHonda paid 4 cents more in interest for each dollar of debt.] Which also means that Honda consumers will be paying 4 cents more/dollar of debt.

Credit lockup still look good to the Pure of Principle?

Both from McArdle's sources, mis-spellings and all...


Grim said...

Would you take a moment to explain that? I'm not as well read on complex financial instruments as apparently I should be. I'm a reasonably quick study, though, if you'll take the time.

Dad29 said...

You probably know what this means even though the quotes use some 'shop-talk.'

Rates have gone up, quickly, even for AAA credits such as Caterpillar and Honda.

The cost of money is rising; there are TWO possibilities: either 1) investors expect more rapid inflation (a good possibility) OR 2) money is harder to get.

Both elements could be driving up the price of money--but with the capital markets being hampered by the banks' lending problems, I'm inclined to think that the proximate cause is the credit lockup.

Grim said...


If we're seeing a crisis in the availability of money, though, shouldn't that decrease inflation? If people are chasing dollars, shouldn't the dollar buy more?

In other words, why would you expect both inflation and also a credit lockup (i.e., why "both elements could be driving up the price of money")? Or do you mean that investors think that either A or B is likely, and either way they need to hedge in this fashion?

Dad29 said...

The latter--"..either A or B is likely..."

But recall that the USD is "relative" in value to other currencies. Thus, inflation actually depresses the value of the USD relative to petroleum, or gold.

That's one of the reasons that petroleum's price went higher--too many dollars were chasing a bbl of oil.

Chalk THAT up to Greenspan's jamming mega-zillions of dollars into the economy since 1989 or so (the DowDrop of 500 points).

Grim said...

Thank you.