Tags: US | Fed | Credit

Fed Survey: Investors Have Bigger Debt Appetite

Tuesday, 13 Jul 2010 02:06 PM


Investors are showing a bigger appetite to fund a range of securities, an encouraging sign that credit conditions are improving.

The Federal Reserve, in its first such survey, released Tuesday, found that demand has increased over the last three months for funding high-grade corporate bonds, stocks, residential mortgage-backed securities issued by Fannie Mae and Freddie Mac and other asset-backed securities.

During the height of 2008 financial crisis, panicked investors lost their appetite to lend against a variety of securities. That cut off the flow of credit to businesses and consumers and plunged the country into the worst recession since the 1930s.

Big securities dealers had "generally loosened" credit terms to important customers, such as hedge funds, private equity firms, insurance companies and other big institutional investors, the survey also found.

That's another sign credit problems are letting up. Some dealers offered lower financing rates, while others eased other terms such as the maximum maturity, documentation requirements and "haircuts," which refer to the percentage subtracted from the value of assets that are pledged as collateral for a loan.

Nonetheless, credit terms were "uniformly more stringent" now than at the end of 2006 — before the crisis started. That was a period known for lax lending standards, another factor for triggering the financial crisis.

The Fed survey also found "little change" over the last three months in terms for derivatives. Derivatives are bets between two parties on how the value of an asset will change. They are often used by companies to hedge risk. But they can be used to speculate, too. Derivatives used to speculate on the housing market were one of the forces contributing to the financial crisis.

The new quarterly survey adds to the Fed's data arsenal. The Fed hopes the information will help it knit together a broader picture of credit conditions around the nation.

The Fed already issues a quarterly report providing a snapshot on demand from businesses and ordinary people to take out loans from banks. That survey also provides information on whether loans became harder or easier to get based on lending standards.

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