Credit markets' rising rates pose economic threat

NEW YORK — Rates may be falling for residential mortgages and the securities backed by them, but there hasn't been a similar loosening in other strained areas of the credit markets.

Rising rates on corporate bonds and commercial mortgage-backed securities, and the decline of more companies into "junk" status, could add to the economy's pain in the coming year — even if homeowners' monthly mortgage payments drop, thanks to the government's plan to buy mortgage assets.

"You put your finger in one part of the dam, and a leak springs in another," said John Atkins, a fixed-income analyst at IdeaGlobal.com.

The rate on Fannie Mae 30-year mortgage-backed securities fell to about 4.25 percent Thursday, said Kevin Giddis, managing director of fixed income at Morgan Keegan. That is down from about 5.5 percent in mid-November. Actual 30-year mortgage rates headed to 5.53 percent this week, according to mortgage financier Freddie Mac, the lowest since January.

But rates for commercial mortgage-backed securities, as measured by the Markit CMBX index, continue to rise, Atkins said. This means that banks will likely keep suffering big losses as the commercial real-estate environment worsens.

Corporate bond rates keep rising, too, and Standard & Poor's said 47 bond issuers have moved from investment grade to speculative grade, or "junk," since the beginning of the year — the highest number since 2003.

This is a problem, because when companies' credit ratings fall and debt payments rise, they are less able to raise money and more likely to cut costs through layoffs.

And employment, ultimately, is the backbone of the economy. When people are unemployed, they cannot spend, they cannot buy homes, and they usually fall behind on their mortgage payments — continuing the cycle of deteriorating credit.

The Labor Department reported Thursday that people continuing to draw unemployment benefits climbed to a 26-year high. Today, the Labor Department is expected to report another hefty drop in payrolls — economists surveyed by Thomson/IFR anticipate that employers slashed 320,000 jobs in November.

"The economy is getting weaker. There really isn't a good news number that's come out in the last 30 days," Giddis said.

Fears of a protracted recession are slamming Treasury yields — which is good for borrowers with mortgage rates tied to Treasurys, but bad for people invested in money-market funds, which have been buying up Treasurys for safety.

Prices fell again

Treasury prices fell again Thursday, sending rates to new record lows, as the Dow Jones industrial average fell more than 200 points.

The three-month Treasury bill yielded below 0.01 percent, and its discount was 0.01 percent.

One factor keeping companies afloat is that the commercial-paper market is growing. Issuing commercial paper is a way for companies to borrow money for short periods of time to finance operations.

After investor demand for the paper plummeted after the Lehman Brothers collapse and other troubles in the financial sector, the Fed on Oct. 27 started buying highly rated, three-month commercial paper to alleviate the pressures by companies to get short-term cash.

Since then, the overall market has been growing, and the rates that companies have to pay investors have dipped. Commercial-paper outstanding increased by $11.5 billion to a seasonally adjusted $1.65 trillion in the week ended Wednesday, after rising by $26.2 billion in the previous week.

However, the market is not nearly as robust as it was before the credit crisis wiped out investors' appetite for risk. The amount of commercial-paper outstanding remains down from $1.82 trillion before Lehman's bankruptcy, and down from $2.2 trillion at the market's peak in the summer of 2007.

And over the past week, the amount of asset-backed commercial-paper outstanding fell by $15.1 billion. Most commercial paper is unsecured debt, but some of it is backed by assets such as mortgages and credit-card debt.