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Credit markets are showing hints of a thaw, and this time the improvement seems likely to stick, not fizzle -- as happened last fall and early this year.
One positive sign is that banks are repairing their balance sheets, raising more than $200 billion in capital so far this year. And the interest-rate gap between Tiffany-quality Treasuries and riskier bonds is narrowing, which is sign that investors are feeling confident enough to buy bonds beyond those that are top-rated.
Another sign of budding investor confidence is the pickup in stock prices. Most indexes have recouped recent losses. The Dow Jones Industrial Average is just shy of what it was worth at the start of the year after having plunged as much as 13% during March.
But, despite the hopeful signs of a recovery, the crisis isn't over yet. Federal Reserve Chairman Ben Bernanke, in a speech on May 13, cited several improvements. However, he added, "At this stage, conditions in financial markets are still far from normal." Other Fed officials have made similar remarks recently.
In fact, the latest Fed survey of lending officers found that big banks are still tightening standards for loaning money to their business customers and consumers while they wait for the U.S. economy to stabilize. That could take at least until the first quarter of 2009.
Moreover, rates on mortgages are declining at a snail's pace. This is a particularly important area because the sharp drop in home sales and prices continues to be a big drag on the economy. The Fed has axed short-term rates seven times for a total of 3.25 percentage points since last September, and that's had a favorable impact on adjustable rate mortgages. But rates on 30-year fixed mortgages have barely budged, and rates on jumbo loans, above $725,000, are high enough to still discourage potential buyers.
Interest rates and the credit markets are also feeling inflationary pressure from food and energy prices, which continues to spike higher.
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