You can afford it, but you still can’t have it.

NEW YORK – Bank-to-bank lending rates eased further Friday and demand for Treasury bills let up slightly, but there are still signs the companies that need credit most might not be able to get it.

Corporate bonds are being issued at the weakest pace in a decade, and it’s been three weeks since a high-yield corporate bond, or junk bond, has been issued, said John Atkins, a fixed-income analyst at IDEAGlobal.com.

This drought is partially due to companies sitting on the sidelines, waiting for conditions to improve. But it’s also because there are not enough buyers. This is a problem, because when companies can’t get funding from the markets, they have to draw down their credit facilities with their banks – which often forces the banks to hike their borrowing rates.
As the economy weakens, “the companies that are going to need funding the most desperately are the ones further down the credit quality ladder,” Atkins said.

On Thursday, Standard & Poor’s said it expects the rate of default in the U.S. speculative grade segment to rise significantly in the next 12 months to a six-year high of 7.6 percent.

A handful of investment-grade companies were able to sell bonds this week, including MetLife Inc., energy company Occidental Petroleum, London-based alcohol maker Diageo PLC, and utilities PG&E Corp., PPL Corp. and FirstEnergy Corp.’s Ohio Edison. Those utilities, however, had to pay higher-than-normal rates, Atkins noted.

Keeping Wall Street optimistic about the credit markets, however, is the steady decline in bank-to-bank lending rates, which on Friday fell for the fifth consecutive day. The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.41 percent from 4.50 percent on Thursday. The overnight Libor for dollar loans has decreased substantially, dropping to 1.67 percent from 1.94 percent and nearing the U.S. Federal Reserve’s target fed funds rate of 1.5 percent.

Libor, which affects consumer loan rates ranging from adjustable rate mortgages to credit cards, is a market lending rate between banks determined by the institutions; the fed funds rate is the rate at which banks lend their funds held at the Federal Reserve to one another, and is therefore controlled to a certain extent by the Fed.

Rates on commercial paper – the unsecured debt that companies sell for their short-term cash needs – were also down.

Commercial paper buyers, a good deal of them money market funds, have pulled back after certain money funds took big hits from their exposure to Lehman Brothers Holdings Inc., the investment bank that went bankrupt. Instead, investors have been hunkering down in Treasury bills.

But a modest rebound in the yield of the three-month T-bill indicates that some investors might be starting to head back toward commercial paper, money market funds and Federal agency notes, Morgan Keegan fixed-income analyst Kevin Giddis wrote in a research note. The three-month T-bill’s yield rose to 0.65 percent Friday from 0.47 percent late Thursday. It has not surpassed 1 percent since Oct. 7.

On Thursday, the Federal Reserve said the amount of commercial paper outstanding fell for the fifth straight week in the week ended Wednesday, shrinking by $40.3 billion to a seasonally adjusted $1.51 trillion. That’s down from $1.81 trillion in late September, and down from the peak of $2.2 trillion reached in the summer of 2007.

Trading in longer-term Treasury issues took its cues largely from the stock market, which was volatile Friday after a 401-point jump in the Dow Jones industrial average Thursday and a report early Friday showing a larger-than-expected decline in September new home construction.

The 2-year Treasury note rose 2/32 to 100 25/32 and yielded 1.60 percent, down from 1.63 percent late Thursday. The 10-year note rose 7/32 to 100 17/32 and yielded 3.93 percent, down from 3.97 percent. The 30-year bond fell 7/32 to 103 28/32 and yielded 4.27 percent, up from 4.26 percent.

Associated Press

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