Treasury’s Lowest Yields Offer No Help to Companies

[RedEarth]

Dec. 12 (Bloomberg) -- The lowest yields on Treasuries are providing no solace to U.S. companies paying the highest borrowing costs on record.

While rates on everything from four-week Treasury bills to 30-year bonds fall to all-time lows, companies are paying an average 10.8 percent on their debt, up from 6.53 percent in January, according to Merrill Lynch & Co.’s U.S. Corporate & High Yield Master Index. The premium investors demand for lending to companies instead of the government rose to 8.85 percentage points yesterday, compared with 2.96 percentage points at the start of the year, the index shows.

“The only place where there is liquidity is Treasuries,” said Mirko Mikelic, a senior money manager at Grand Rapids, Michigan-based Fifth Third Asset Management, which oversees about $22 billion in assets.

The $8.5 trillion committed by the U.S. to rescue the financial system hasn’t succeeded in unlocking credit markets that seized up with the collapse of the subprime mortgage market in August 2007. AT&T Inc., the largest U.S. telephone company and a benchmark borrower in the corporate bond market, sold $1.5 billion of 6.7 percent notes last month that yielded 4.38 percentage points more than Treasuries, compared with 1.68 percentage points in an offering a year ago.

Flight to Quality

“The government would give up yield to unfreeze credit markets” if it would help, Mikelic said. “But right now there’s a tremendous flight to quality that’s going on. A lot of people globally are concerned still about the viability of the financial system.”

Oklahoma Gas & Electric Co., the state’s largest electrical utility, this week agreed to pay a coupon of 8.25 percent and a spread of 5.49 percentage points to raise $250 million in a sale of 10-year notes, compared with 6.35 percent and 2.75 percentage points just three months ago, according to data compiled by Bloomberg. Monongahela Power Co. issued five-year first-mortgage notes with a spread more than six times what the Fairmont, West Virginia-based utility paid two years ago for 10-year bonds.

Investors are willingly accepting negative yields for the first time to own Treasuries even as the U.S. commits more than half the value of the nation’s gross domestic product to halt the worst recession since the Great Depression. The government sold $27 billion of three-month bills this week at a discount rate of 0.005 percent, the lowest level since the auctions began in 1929.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aWlAPF7Hpo4U&refer=home

[unlawflcombatnt]

1. No Worthwhile Investments

Banks aren't lending because there's no one to lend to that can pay them back. If there are no profitable investments on the horizon, due to a contracting economy, then there is no one they can loan to who'll pay them back.