After unprecedented interventions by the Federal Reserve, Treasury and central banks around the world to stimulate lending, there are signs credit is finally beginning to thaw.

Share story

Credit conditions have been tightening since July 2007 as soaring defaults on mortgages led to failures of banks and other financial institutions. The ability to borrow is critical to businesses and governments, as well as consumers. After unprecedented interventions by the Federal Reserve, Treasury and central banks around the world to stimulate lending, there are signs credit is finally beginning to thaw:

Cash flows back into money-market funds

Once considered a higher-yielding alternative to bank accounts, these funds fell out of favor in September after a money-market fund holding debt of bankrupt Lehman Brothers, the Reserve Primary fund, “broke the buck,” or fell below $1 a share.

Money-market funds are among the biggest investors in commercial paper, short-term debt companies use to fund day-to-day operations, like paying salaries. “Volatility and turbulence are troubling,” says Jack Ablin, chief investment officer of Harris Private Bank, “but I get scared when I see the money markets freeze up.” The Federal Reserve began a program Monday to purchase commercial paper to help unfreeze the market. Last month, the Treasury announced a temporary guarantee of assets in money-market funds.

Libor is falling

Worries about the recent failure of Washington Mutual and other lenders caused banks to charge more for short-term loans to one another. Their lending rate, the London interbank offered rate on 90-day U.S. dollar loans, rose to nearly 5 percent from 2.5 percent in March. But lately, the rate has come down. About $10 trillion in corporate and consumer loans are pegged to Libor, according to University of Edinburgh professor Donald MacKenzie.

The 3-month Treasury bill is off lows

High demand inflated prices and briefly pushed yields on these ultra-safe assets into negative territory. “Investors were so panicked, they were just wanting to ensure they would get their money back,” Ablin says. Rising yields signal a return to riskier assets.