American Honda (the finance arm of the car company) just issued 5 and 10 year bonds similar to Catapiller. They are rated AA, and the offering went off at 400 over. Things are getting ridiculous.Translation: Honda's finance arm just had to pay an extra 4 cents on every dollar it borrows. That's going to pass straight through to anyone who wants them to finance a car.
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Doesn't seem like that big of a deal.
There's no right to cheap money, after all.
Seems like the market passing its judgment on inflation expectations. Uncle Sam does seem to be planning to print 7 Billion shiny new C-Notes, after all. Can't blame people for asking for a premium in the meantime.
Unless it has to borrow more than a dollar or every dollar of sales it does, this means what? At most a Honda costs 4% more? I should think the prices vary more dealer to dealer by that much.
I'm having a hard time panicking here. Unless you are saying 'This is only the begining!'
Megan,
Can you put this into some kind of historical perspective? How often have companies at this rating had this big a difference from treasury bills?
Could this be partly pricing in the expectation of default from the financial collapse, which maybe a lot of people don't expect to be stopped by the bailout? Or is there some other explanation?
Can you put this into some kind of historical perspective? How often have companies at this rating had this big a difference from treasury bills?
The 5-year treasury rates are currently at 2.69, while a year ago they were 4.25. It doesn't sound like Honda's financing costs have gone up that much, and lets also remember that the spread between the treasury and LIBOR is fairly large as well. I think this reflects on how low treasury rates have gotten more than anything. We've had such a flight to safety on treasuries (driving rates down) that of course the spreads are going to be higher than normal.
Translation: Honda's finance arm just had to pay an extra 4 cents on every dollar it borrows. That's going to pass straight through to anyone who wants them to finance a car.
Translation: years of consuming more than we produce mean we're temporarily going to see living standards decline or stagnate. That extra fifty bucks on the Honda lease means you'll have to cancel HBO or eat out less often. Of course we could have accepted the Paulson plan as is and spent the extra fifty bucks on taxes. Money's fungible and all...
I'm assuming this is the finance arm. I think what you are beginning to see is that for financial firms is that the market will start to price in the risk of a sudden collapse in confidence and credit risk - see Lehman. Barring fraud, most industrial companies when the die typically die slowly and investors have time to adjust e.g. Ford and GM.
c. gray
"Seems like the market passing its judgment on inflation expectations. Uncle Sam does seem to be planning to print 7 Billion shiny new C-Notes, after all. Can't blame people for asking for a premium in the meantime."
That's a nice theory C. Gray, unfortunately it's completely wrong.
The yield spread between 10-year inflation-protected Treasuries and conventional Treasuries, which gauges expectations on the consumer price index 10 years forward, is today at 1.82%, down from 1.85% yesterday and 1.97% on Monday. These levels are substantially better than in early July, when the market was priced for a 2.61% inflation rate.
C. Gray -
This has nothing to do with inflation expectations. He's talking about the spread to the Treasury, which itself moves up or down according to inflation.
Re: Translation: years of consuming more than we produce mean we're temporarily going to see living standards decline or stagnate.
Last I checked Honda is not an American company. Or are you claiming the whole world deserves to get stiffed because it's living a bit too well? The spirit of John Calvin lives on I guess.
This isn't an area of expertise for me, but it seems like interest rates are going to be going up significantly no matter what happens. Leaving things alone will mean more of this. Raising the money for a bailout by issuing t-bills will require raising their rates, which will bump up the rates of bonds corresponding, since who wouldn't rather own the less risky investment. Raising the money for a bailout via just printing up more of it will drive the bond issue rates via inflation. The size problem for the economy as a whole seems like it would remains constant, but the difference would be whether the bulk of it falls on borrowers or lenders.
Or are you claiming the whole world deserves to get stiffed because it's living a bit too well?
I'm claiming there's no way to avoid a temporary drop in living standards unless somebody comes up with a perpetual motion machine pretty damn quick. I don't doubt that a Very Serious Great Depression-like downturn could transpire, eventually, if nothing is done. But so far we're not there yet, and these anecdotes I keep hearing about don't seem any worse than the monstrosity dreamed up by the former boss of Goldman (I mean, seriously, what difference does it make whether you cut your budget to afford your now higher car payment or your now higher income taxes). And Megan's post was most definitely referring to an American company, by the way.
Ding!
Credit is going to be more expensive and harder to get for a long time. Does this surprise anyone? I'm sure it does. An entire generation lived in a time where credit seemingly grew on trees. It wasn't supplied by a market, it was just there for the taking.
If things hinted at getting a little tight then The Maestro would utter some words and lower the Discount rate and manic depressive starlets could still get boob jobs no money down at a low rate and the loan would be securitized, no sweat. Maybe she'd hook up with a hedge fund guy to pay it off. It was a beautiful thing. Not only that it was productive. The bust size of American women has increased at a rate that is the envy of the rest of the world. But I digress.
Uh, why is it that a AA-rated company should be able to borrow at the same rate as the USA? Saying that their cost is 400 bips higher is **INSANE**. HMC NEVER could have borrowed for T+00.
5 year AA corporate bonds are trading at about 350 over T; last month it was about 330. So Honda's paying about 70 bips more, or $7 per $1000 more than the recent past.
So your Accord EX-L, financed thru HMC would cut into their profits by about $175/year, compared to if they'd issued their bonds 15 months ago. Just means that Honda won't be offering any 2.9% for 60 month financing. More like 5.9 for 24, 7.9 for 48 and 8.9 for 60--rates that were common 10 years ago--you know, when the economy totally blew.
Last I checked Honda is not an American company.
I believe that American Honda is their finance arm based in the US, for loaning money for cars bought in the US. Since these bonds are dependent on American Honda lending money for car buying (which won't be as robust in a recession) and that money needs to be paid back (more risk when people are more likely to lose their job) I could see how they would be a bit more risky than US treasuries.
Consider that US treasury rates are currently below inflation and well below the LIBOR, I'd say that there is something driving treasury rates down. This is likely due to a flight to safety of US treasuries, and people don't mind losing to inflation as long as their return is >0 in norminal terms. Since the treasury rates are assigned in a bidding process, a lot of money flooding into them would lower them compared to other bonds. This would increase the spread, but wouldn't necessarily increase the interest rate companies borrow at. I don't see how that makes anything more expensive.
Re: I believe that American Honda is their finance arm based in the US, for loaning money for cars bought in the US.
True, but they share the main corporation's credit rating. And that's something to bear in mind: This is a global phenomenon, not just something isolated to the US. Japanese, European Canadian and Australian companies are all funded by the same worldwide banking structure. There are some currency boundaries intact still, but they are low fences easily surmounted. The Schadenfredude crowd who want to see Americans suffer for the sin of electing (or "electing") George Bush and not living in misery like 16th century peasants had better realize that people all over the world stand to suffer. Americans in fact will get off rather easy compared to places like Haiti where folks may actually starve to death from teaching Wall Street and Cannery Row a lesson.
one financing...eh.
Who was their underwriter?
Is Wall Street on 'work slowdown', until they get their welfare plan?
Just asking ...
Btw, when you say 400 over, is that over a 'normal' curve or over our panic-driven curve right now?
A focus on spreads to T-bills is disingenuous. T-bill rates are near zero because in a typhoon, even burying your greenbacks is a risky move. Better to loan them to the guy who makes greenbacks. If his blow away, he can just print more. This is not a typhoon? Could of fooled me.
Can no one spell Caterpillar?