Credit Market Indicators

It is obvious that the economy is one of the chief credit market indicators, but unfortunately when the economy changes to such an extent that it is obvious then it may be too late to do much about it. This was never more apparent than with the mortgage meltdown of 2008 and 2009. Many analysts foresaw it coming but others refused to see it and the results verged on being catastrophic. More banks went under than ever before since the Great Depression of the 1920’s. So what are the main credit market indicators that foreshadow changes in interest rates?

Watch Baa Treasury Spreads
Since 1998, there has been a sharp rise in the Baa Treasury spreads either just before a recession or during the onset of a recession. Sometime this also happens when a recession does not occur, but more often it is a foreshadowing of a recession. Because of the risk involved investors increase their demands for compensation and this in turn has a few varied economic implications. The first is in terms of pre-payment to investors as compensation for taking on a credit risk. The second thing that often occurs is that the Baa Treasury pays a liquidity premium because private instruments at that point in time are less desirable than Treasury notes. Those are just a couple the credit market indicators that are directly attributed to the Baa Treasury spreads. In other words, when the government compensates investors for taking greater risk to keep the economy flowing it indicates the credit market is in crisis.

Corporate Bond Spreads
Many analysts also look at what is happening with corporate bond spreads as a major credit market indicators. Corporate bond spreads don’t carry the same complications and prepayment risks as Treasury spreads but are still subject to the same amount of callability. The implication here is that this type of spread indicates an increase in default risk premiums. From a laymen’s perspective, these higher premiums are in place to mitigate the risk of loss. As a result, corporate bonds have a wider spread based on the assessment of the risk potential loss. Bear in mind that these rates directly affect corporations that depend on the sale of bonds for a number of reasons, most often operating capital. Market analysts have determined that watching corporate bond spreads paints a much more realistic picture than Baa Treasury spreads and should be watched carefully if the health of the credit market is in question.

Bond Spreads and Federal Reserve Surveys
There are other bond spreads which can be watched in order to determine the state of the credit market among which is Brady bonds. It is the spread you are concerned with and any deviation from the ‘norm’ would indicate that something is going on in the credit market. Also, the Federal Reserve periodically surveys loan officers from banks. During times of economic turmoil in the economy the information provided by loan officers at banks is a key indicator as to the state of the credit market. Keeping all of this in mind it is possible to determine exactly what direction the economy is headed in and in turn where interest rates will go.

Credit market indicators are extremely important in terms of both investments and loans. Investors watch these indicators to seek compensation for carrying greater risk and borrowers view the indicators to see where interest rates on new or existing variable rate loans will go. There are other indicators as well that are beneficial in predicting where interest rates will go. Whether you are seeking a new loan or looking to make an investment it is essential to understand and heed these credit market indicators.

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