| Short Term Loan Rates |
| By Credit Federal |
Published
08/21/2008
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Financial News
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Federal Short Term Loan Interest Rate Cut
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Short term interest rates are lower thanks to the Fed, but corporations and home buyers are paying more to borrow thanks to the credit crunch.
To stimulate the economy, key overnight federal funds rates are now down to 2% from 5.25% a year ago. Even the virtually no risk yields of Treasury securities have fallen.
30 year fixed mortgage rates; however, which often follow the 10 year T-note yield closely, have barely budged the past 12 months, and have risen since the first of the year. According to Freddie Mac, 30 year fixed rate mortgages averaged 6.52% last week, up from 6.17% Dec. 31. The yield spread between mortgage backed securities issued by Fannie Mae and Treasury securities is now about 1.5 percentage points, adjusted for the effects of mortgage refinancing. "It's a 17-year high," says Robert Auwaerter, head of fixed income at the Vanguard Group. Fannie and Freddie's mortgage-backed securities have averaged about half a percentage point more than Treasuries, he says.
One reason mortgage rates are so high: Fannie Mae and Freddie Mac are buying far fewer mortgages for their own portfolios. The mortgage giants were major buyers in mortgage markets, and lower demand has pushed yields higher. Corporate borrowers, too, are paying higher interest rates on their bonds. Yield spreads between Treasury securities and corporate bonds are "much wider than usual," says John Lonski, chief economist for Moody's Investors Service. Borrowers are demanding higher yields to offset the risk of default. Those high yields, relative to Treasuries, "warn that the risks facing corporate finances are very substantial," Lonski says.
Corporate borrowers with shaky credit ratings; junk bond issuers, are being pinched even more. Junk bonds currently yield about 8 percentage points more than Treasuries, Lonski says.
Although that's not as high as the record in 2002, when junk yielded as much as 10 percentage points more than Treasuries, it's worrisome to Lonski because junk yielded about 5.3 percentage points more than Treasuries just three months ago.
The high-yield default rate is about 3% now, says Lonski, but Moody's expects it to rise to 7.3% next year. But Sandy Rufenacht, bond manager at Aquila Three Peaks High Income fund, thinks that junk-bond yields already reflect higher future default rates. "The default rate is usually a lagging indicator," he says.
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