More Good News: Credit Markets Continue to Heal

(MoneyWatch) 

With the markets going up, some of you may be wondering if the worst is really over, or if this is another false start like the one we had in November. While we certainly can't guarantee the worst is over, there's plenty of good news regarding the markets that you should know.

Perhaps the most important indicator of credit market health is the TED spread. The spread indicates the willingness of banks to lend to each other, and is thus a good indicator of the confidence in the banking system. The TED spread is down to just 0.69 percent, its lowest mark since August 2007.

Another sign that confidence is being restored to the banking system is that many of the banks that needed to raise capital according to the government's stress tests were able to do so easily in public equity offerings. In fact, some of the offerings were oversubscribed. In addition, banks such as Bank of America have been successful at raising billions of capital by selling strategic assets.

The combination of equity raises, asset sales and and the widening of spreads on their traditional lending business should help banks repay TARP funds quickly, getting them away from the conditions that went along with those funds.

Another sign that credit markets are healing are the multibillion dollar bond offerings from companies such as JP Morgan, MGM, American Express and Microsoft. Also, spreads on asset-backed loans such as mortgages and auto loans have continued to narrow.

While there will likely be more pain in terms of credit losses (especially on credit card debts and commercial loans), the markets are gaining confidence in the Fed's and the Treasury's actions. As I mentioned on Wednesday, you should guard against being overconfident in the recent rally. However, that doesn't mean you should be pessimistic about the market. These positive events help explain why the stock market has experienced such a sharp rally.