Monday, August 18, 2008

Lower rates coming our way

Battered US financial groups will have to refinance billions of dollars in maturing debt over the coming months, a move likely to push banks’ funding costs higher and curb their profitability, say bankers and analysts.

The banks’ need to raise capital to offset mounting credit-related losses is forcing them to pay higher interest rates to entice investors..

Mohamed El-Erian, co-chief executive of Pimco, the asset management group, said: “If banks keep borrowing at these levels, you will get a repricing of credit for the whole economy.”

Adding together 10 of the biggest bank borrowers, Dealogic said that maturing bonds total $27bn in August, $52bn in September, $23bn in October, $20bn in November and $86bn in December. The extent of the scramble for funds became clear last week when banks tapped central lending facilities, with strong demand for one- and three-month money lent by the Federal Reserve and the European Central Bank. US commercial banks borrowed a record daily average of $17.7bn from the Fed last week.

Watch rates go down, not up in this scenario. The market is smart enough to know how weak the economy is, and that higher rates would kill it. And the banks need the lower rates to refinance their debt. And they'll get it.

Just like our economy needed lower oil. They got it. And now we will get lower rates.


Anonymous said...

I really don't understand your analysis when Citigroup sold its 6.5 percent senior notes at a yield of 337.5 basis points more than Treasuries.

AIG sold the 8.25 percent notes. The debt paid a yield of 433 basis points over benchmark rates.

American Express sold $2 billion of five-year notes with a 425 basis point spread and JPMorgan sold $1.6 billion of 8.625 percent perpetual preferred securities.

Anonymous said...

forgot to post source...