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Prospects daily: Corporate borrowing costs at narrowest rates since late-2007

Global Macroeconomics Team's picture

Important developments today:

1. Corporate borrowing costs narrowest since late-2007

2. U.S. headline inflation remains flat in February

3. Leading indicators point to slower growth in second half


Corporate borrowing costs narrowest since late-2007. Corporate bond yields fell to the lowest level relative to benchmark government securities since the credit crisis started to distress markets in 2007, as the ongoing sovereign debt crisis in Europe prompted investors to look for alternatives to government debt. The extra yield investors demand to own corporate securities rather than U.S. Treasuries fell today to 156 basis points (bps), or 1.56 percentage points, the lowest since November 2007 and a less than a third of the spreads a year ago, according to the Bank of America Merrill Lynch Corporate Bond Index. Corporate bond spreads soared in the wake of Lehman Brothers’ collapse in September 2008 and remained close to record highs for the following six months.

Companies took advantage of lower borrowing costs by pushing issuance volume to a record. Corporate bond sales around the world rose to an all-time high of $3.2 trillion in 2009, rebounding from the rout of 2008 that deeply damaged corporate-bond value. Despite a brief sell-off in February, when market jitters over sovereign default risk in Europe made some companies postpone their bond offerings, global corporate bond sale has totaled at least $612 billion thus far in 2010, according to data compiled by Bloomberg.


U.S. headline inflation remains flat in February. The Labor Department’s Consumer Price Index remained flat in February following a 0.2% (m/m) gain in the previous month, as lower energy costs left room for the Federal Reserve to support growth by maintaining record low interest rates. A 0.5% decrease in energy prices, led by a drop of 1.4% in the gasoline index, was offset by monthly increases of 0.7% and 0.1% in prices of automobiles and food respectively. Core prices, which exclude energy and food costs, increased by 0.1% in February after registering a similar decline in January. On an unadjusted annual level, headline as well as core inflation increased in February, but by smaller amounts than seen in previous months. Consumer prices rose 2.1% (y/y) in February, down from 2.6% in January, while core prices were up 1.3% (y/y) from last year compared to an increase of 1.6% in January.

Initial claims ease once again…New claims for unemployment benefits declined by 5000 to a seasonally adjusted 457,000 in the week ending March 12. The general declining trend in new claims was interrupted by a sharp increase in layoffs over January and February 2010 as severe winter storms in the Northeast shut down factories temporarily. However the weather-related strain on labor markets to have eased in March, and new claims for benefits have been decreasing for three weeks running. The 4-week moving average of claims, a less volatile measure of layoffs, also began sloping downwards with this week’s data.


Source: The Conference Board


Leading indicators point to slower growth in second half. The Conference Board’s index of Leading Economic Indicators rose from 107.5 in January to 107.6 in February, registering the smallest month-on-month growth in the indicator since the index began growing again eleven months ago. The most recent LEI reading points to a slower pace of growth in the second half of the year. A rebound in manufacturing in the latter half of 2009 brought about an ease in pace of layoffs, however, without a consistent revival in consumer demand, employment gains, and the subsequent pace of recovery, are likely to be weaker in the coming months.


Among emerging markets:

In East Asia and Pacific, the People’s Bank of China  sold bills amounting to 213 billion yuan this week in an effort to drain excess liquidity from the financial system and restrain inflationary pressures.

In Latin America and Caribbean, Brazil kept the key interest rate unchanged at a record low 8.75% today, despite the latest inflation data showing a 4.8% (yy/) increase in prices in February, above the Central Bank’s target rate of 4.5%.

In Middle East and North Africa, Egypt’s central bank left the key overnight lending rate unchanged at 9.75%, in line with expectations. Annual urban consumer price inflation was 12.8% in February, down from a peak of 23.6% in August 2008.

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