Bond fundraising costs set to soar to decade high

Fundraising costs that corporations, including banks, must pay are on track to rise to their highest in more than a decade a the market expects the financial crisis to grow still worse.

Investors worried about the risk of a deteriorating econo¬my, both in the US and throughout the world, are demanding higher premiums to buy bonds amid fears of ris¬ing default rates and the shaky financial status of many banks. The Financial Times quoted Lehman Brothers as saying a surge in bond deals had raised creditrisk premiums.

In early May, spreads for US investmentgrade banks and companies rose to their highest level since the early 1990s. Spreads measure the extra interest a company must pay above safe government bonds. This is known as the risk pre¬mium. In Europe and Asia, spreads for many investmentgrade companies are at 10year highs, Lehman Brothers said.

Other issuers forced to pay very high yields over govern¬ment bonds this month include Citigroup, American Express, AIG and Deutsche Telekom. Concerns about the health of the banking system have led investors to shun all but the safest government debt, spark¬ing the biggest endofyear rally for treasuries since 2000.

On the other hand, banks also charged others more.

Bloomberg reported most of the bond strategists and sales¬men that Resolution Investment Management's Stuart Thomson talked to last August expected the credit crunch to be long over by now.

Instead, money markets show there's no end in sight, and it may even worsen.

"It's like an ongoing night¬mare, and no one is sure when we're going to wake up," said Thomson, a money manager in Glasgow, Scotland, for Resolution, which oversees US$46 billion (Bt1.56 trillion) worth of bonds.

"Things are going to get worse before they get better."

In a replay of last year's final four months, interestrate derivatives imply banks are becoming more hesitant to lend, on speculation that credit losses will increase as the global economic slowdown deepens.

Premium banks' charge for lending shortterm cash may approach the record levels seen last year, based on trad¬ing in the forward markets, where financial instruments are sold for future delivery.