Utilities, which you would think would be somewhat immune to the economic crisis and the recession, have seen their borrowing costs rise by almost 300%.



Your basic investment-grade corporate bond has risen threefold, from just over 90 bps to almost 280 bps. Again, that puts a real squeeze on profits.

Merrill Lynch US Industrials Index



That’s the short-term view. Now, let’s drop back and look at what has happened since 1997. Credit spreads are now much higher than even in the worst of the last recession. (Source: Bespoke)



And if you have to go into the high-yield market, which is now once again referred to as the junk bond market, you’ve really been hit. Your spreads, on average, have risen from 240 bps to over 860 bps in the last year. That means if (and that’s a big if) you can find someone to loan you money, you’ll likely be paying an interest rate close to 13% for your money. (The spread is the green line in the chart below.)

Merrill Lynch US High Yield Index



One last chart. This one is the spread between LIBOR and the Fed funds rate. LIBOR is the London Inter Bank Offer Rate. This is what banks charge each other to lend money among themselves. (This chart courtesy of my friends at GaveKal.) Notice the spikes since 1988: the recession of 1991, the 1998 Long Term Capital Management crisis, and then the lead-up to Y2K. After that, LIBOR went flat.

LIBOR may be the most important rate of all, as so many contracts, including many US and European mortgages, are based on LIBOR. Hedge funds, mortgage banks, large and small corporations, and a host of interest-rate-sensitive investments borrow money based on LIBOR. Few of them anticipated such wild swings.

Libor Spread

Click to enlarge

Bottom line? One of the clues as to the end of the credit crisis will be when credit spreads move back closer to historical norms. And we aren't close to that yet.