The Very Slow Thaw

The speed and size of yesterday's stock-market rally -- which is being continued today -- should absolutely not be taken as any indication that the credit crunch is over. It represents hope that the crunch will be over -- and quite a reasonable hope at that, given unlimited central bank liquidity and an FDIC backstop on new bank debt. But it's going to take some time for the credit markets to unfreeze.

Three-month Libor was fixed today at 4.63%, and the TED spread is 445bp: those are really high levels, and not indicative of any interbank lending going on at all. Spreads on bank CDSs are also still extremely elevated:

Morgan Stanley CDS spreads dropped 182.5bp to 800bp, and Citigroup fell 22bp to 200bp in early trade, according to traders.

In the non-financial world things are similar: spreads are tighter, but they're still so wide that the markets are effectively frozen.

The fact is that the credit market is a supertanker, based on trust, not speculation. As such, it takes a very long time to turn around, and I do have a feeling that the stock market is getting ahead of itself here. This rally is so big that it can't be attributed solely to relief that there won't be any more bank failures; it has to be pricing in a renewed flow of credit in the real economy. But that hasn't happened yet, and we'll probably have to wait for quite some time until it does happen -- especially given that the US government hasn't followed the UK's sensible lead of forcing banks to continue to lend at their 2007 levels.

One hint of this can be seen in the GE share price, which is stubbornly refusing to partake in the rally, despite the fact that GE now has direct access to Fed liquidity. Remember that if GE can't get credit, most of the companies in America can't get credit. If traders are still very worried about GE's funding risk, even after the Fed announcement, that means credit is still a long way from flowing again. If all you do is look at the stock market, you might think that all the government announcements of the past few days have done a lot of good. But the jury's still out on that, in the real world.

Update: The thaw continues, although spreads are still high on an absolute basis. Accrued Interest also notes some technical factors in the CDS market:

The CDX is 50bps tighter to 170. Goldman about 250 tigher to +200, Merrill 190 tighter to +180, Citi 230 tighter to 110, Bank of America, Wells and J.P. Morgan each about 80 tighter. Morgan Stanley goes from 20-something points up front to about +370...
I'd look for a violent short-covering in financial CDS. The big names have been de facto guaranteed by the government, like it or not. They've got a bigger balance sheet than you, and they are now using it in full force. Don't fight it. If you don't like it, just stay out of the way.