Although risk aversion remains very high because of the financial crisis and global recession fears, continued government action has helped calm markets, say David Wyss and Beth Ann Bovino, analysts for Standard & Poors. Long-term Treasury bond yields have risen despite Fed purchases, and the Federal Open Market Committee's (FOMC) promises to increase purchases of other assets have helped to bring down rates, especially for mortgages. The Supervisory Capital Assessment Program (SCAP) report on May 7 made markets less worried about stress, and the economy seems to be finding a bottom. (See Oil and Gas Investor, July 2009, "Bank Stress Test" for further details.) Moreover, the Treasury Department has allowed 10 of the nation's largest banks to repay $68 billion in government bailout money. The Treasury-to-Eurodollar (TED) spread, a measure of banks’ willingness to lend, held at 43 basis points (bps) this week, down from 99 bps three months ago. The LIBOR market "seems to be getting back to normal," according to the analysts. The equity-market volatility index (VIX) edged down to 26.2 from 26.4. The 30-year mortgage rate rose 4 bps after last week’s jump, to 5.42%, up from a record-low 4.6% in March. Also, the Mortgage Bankers Association mortgage applications index fell 18.5% during the week ended June 26. Purchase applications were down 4.5%, and refinancings plunged 30.0%, on higher mortgage rates. The CRI credit default swap index from Credit Derivatives Research, calculated as the average five-year CDS spread of the 14 names in which notional CDS counterparty risk is overwhelmingly concentrated, jumped 30 bps last week to 174 bps, far above the 95 bps reading last year but down from 243 bps in March. "We have added the Credit Default Swap index for the S&P 100 covering nonfinancial companies, which is now being produced by the S&P index group," says Wyss. "This index fell to 82 bps from 89 bps a week ago. The CDS rates show that the market is calmer, but even the S&P 100 rate is above year-ago levels, nearly double where it ought to be based on long-term risk."
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