Credit market conditions eased Wednesday, not from any big improvement in underlying conditions but because the U.S. Federal Reserve is expected to throw moral hazard concerns to the wind and cut rates again in October.
The world's top central bankers, including Fed Chairman Ben Bernanke, have repeatedly warned that they will not bail out feckless investors by cutting official rates to prop up markets but financial markets are pinning their hopes on just that.
Demand for safe haven assets such as U.S. Treasury bonds was lower, equities were higher and gauges of risk appetite such as European credit spreads showed investors were more willing to take a chance.
A growing trickle of borrowers were willing to launch bonds but the mood was at best cautious.
Defaults on U.S. mortgages in August have triggered global fears of exposure to tainted debt, and there were signs the crunch might have spread to Russia where lending rates between banks hit their highest level on Wednesday since the middle of 2005.
"The negative impact of weaker economic growth perspectives on credit fundamentals and the persistent uncertainty about mortgage and leveraged buyout markets warrant a continuous cautious stance towards credits," said strategists at ING in a note to clients.
Recent corporate news has offered few grounds for complacency.
Credit Suisse said it would cut 150 jobs in its mortgage-backed securities business because of a sharp fall in activity and analysts said other investment banks were likely to follow suit soon.
Rating agency Standard & Poor's said on Tuesday that U.S. industrial companies have the weakest credit profile ever and forecast a big increase in defaults over the next year, while Italian airline Alitalia said it was in a "comatose" state and cannot repay more than 1 billion euros in debt due in the next three years.
Euro, Russian Money Market Tight
European money market rates continued to tick higher with the overnight London interbank rate (LIBOR) for euro deposits moving up to fix at a fresh 3-week high of 4.3525%, compared with 4.24750 on Tuesday.
The high rate levels show banks still reluctant to lend to each other despite the European Central Bank's best efforts to pump cash into the interbank market since Aug. 9.
It allotted 50 billion euros of three-month refinancing on Wednesday at an average rate of 4.63% -- the highest since March 2001.
Overnight rates on Russia's interbank money market touched 10%. "Big ruble liquidity providers seem to have pulled back from giving money to other banks so we are having our own version of the credit crunch here," the head of treasury at one commercial bank in Moscow told Reuters.
The weakness of the dollar, falling on the perception U.S. rates are coming down, is intensifying the squeeze because oil firms are reluctant to repatriate export revenues, leaving Russian borrowers struggling to access debt markets despite an injection of $2.24 billion by the central bank.
After U.S. data on Tuesday, interest rate markets moved to price in a 90% chance of another 25 basis point rate cut in October, the highest in a week, from 72% before.
Less Drama in the UK
The UK was calmer, recovering from the first run on a major British bank for more than 140 years after mortgage lender Northern Rock had to seek emergency funds from the Bank of England on Sept. 14 because of the credit crunch.
There were no bids at the Bank of England's 3-month cash auction where the central bank would have supplied funds at a penal rate of 6.75%. But dealers say that may be partly because banks fear they risk emulating Northern Rock if they are seen bidding for such funds.
The central bank's bid to cut three-month rates has had some effect with the 3-month LIBOR sterling rates fixed at a 1-1/2 month low of 6.31625%, having fallen from a nine-year high above 6.9% set earlier in September. Three-month rates were below 6.05% early in August.
Overnight sterling rates fell to a three-month low of 5.66%, below the Bank of England's benchmark interest rate of 5.75%.
Borrowers Take the Plunge
There were more signs of light in the bond market where U.S. drug maker Schering-Plough saw strong demand for its planned 2 billion euro, two-part bond with order books in excess of 6 billion euros, an official at one of the banks managing the sale said.
The deal follows a run of strong demand for investment-grade corporate debt issuance in the past couple of weeks after the primary market reopened in September.
French electrical engineering firm Schneider Electric saw order books almost ten times oversubscribed for its 600 million euro bond on Tuesday.