NEW YORK--The credit markets showed renewed signs of stress Friday as investors, worried about plunging stocks and the possibility of companies defaulting on their debt, fled once again to the safety of Treasury bills. Another dip in bank-to-bank lending rates offered little relief.
Fears are growing that the world could suffer a serious, widespread recession, and large investors -- particularly hedge funds -- are responding to the turmoil by deleveraging, or trying to pay off their debts. Deleveraging involves selling stocks and other assets, and in turn, causing them to plunge in value.
The cost of insuring against investment-grade corporate bond defaults surged to a record level Friday, according to broker Phoenix Partners Group, citing the Markit CDX North America Investment Grade Index. That indicates that the fear that highly-rated companies won't be able to pay back their debt has reached an all-time high.
Investors' flight to Treasury bills and a 400-point drop in the Dow Jones industrial average in early trading also suggested the modest improvements in the credit markets seen over the past several days might be hitting a plateau.
The three-month T-bill's yield fell to 0.78 percent, down from 0.94 percent Thursday and down from 1.01 percent Wednesday. A low yield indicates that demand is high, and that investors are willing to earn meager returns in exchange for a safe investment.
Three-month lending rates among banks in the U.S. and Europe slipped again Friday -- but just barely -- amid fears over global economic growth.
The London Interbank Offered Rate, or Libor, on three-month loans in dollars dipped to 3.52% from 3.54% on Thursday. The so-called European Interbank Offered Rate for three-month euro-denominated loans eased to 4.918% from 4.921%
The drop in Libor has been welcome, but banks are still hoarding cash. The Federal Reserve reported late Thursday that banks' excess reserves more than doubled in the two weeks ended Wednesday to $282 billion from $136 billion in the two-week period ended Oct. 8. That is up from $68.8 billion in the period ended Sept. 24, and up from $2.3 billion in the period ended Sept. 10.
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