American Express Delinquencies Hit 4.4%, Defaults 6.96%

Bloomberg is reporting American Express Delinquencies Rise to 4.4 Percent.

American Express Co. had its highest monthly increase in credit-card delinquencies on record in October as jobless claims rose, according to FBR Capital Markets. Late payments rose 35 basis points to 4.4 percent last month, according to a report yesterday from FBR analysts led by Scott Valentin in Arlington, Virginia. The default rate increased 33 basis points to 6.96 percent, the highest since November 2005, the report said.

Becoming a bank won't relieve American Express from having to borrow money in the bond market, the analysts said.

There were no sales of bonds backed by credit-card payments in October, the first time since 1993, when the asset-backed securities market was in its infancy. Yields on top-rated credit card bonds relative to benchmark interest rates reached a record high of 525 basis points more than the London interbank offered rate, or Libor, last week, according to Bank of America Corp. data.

1-Month LIBOR Drops To 1.45



Chart courtesy of Bloomberg.

Many are looking at LIBOR as a sign of a credit thaw. Certainly it is a dramatic improvement over the record spreads 1 month ago vs. the Fed Funds Rate. On a personal note, if Bernanke cuts rates in December as expected and the spread to LIBOR holds under 50 basis points, our mortgage rate will drop to an almost unbelievable 1.75% (1.25%+1 month LIBOR).

The deflation bet pays off. Thank you $Ben.

Anyone in existing pay option ARMs or interest only loans tied to LIBOR or 1 year treasury rates will see substantial relief on their mortgage payment. 1 year treasury yields are sitting at 1.05%.

No Credit Thaw Yet

To determine whether there is a credit thaw, LIBOR cannot be looked at in isolation. Here are two key points from the article above.

• There were no sales of bonds backed by credit-card payments in October, the first time since 1993.
• Top-rated credit card bonds relative to benchmark interest rates reached a record high of 525 basis points over LIBOR last week.

Further evidence of a credit freeze can be found in mortgage rates.

New Mortgage Rates



The above chart shows mortgage rates are higher than a year ago, but to properly compare rates to a year ago, one must also look at treasury yields from a year ago.

10 Year Treasury Yield



click on chart for sharper image

The current yield on 10-year treasuries (on which 15-year fixed rates mortgages are based) is roughly 3.50. One year ago it was 4.05. On that basis one might have expected mortgage rates to have dropped by about 45 basis points. Instead they have risen about 26 basis points, or a total of 71 basis points higher than one might have expected.

In addition, down payments are higher, fees are higher, up front points are higher, and FICO score requirements are higher than a year ago. All things considered, mortgage rates are somewhere between 71 and 125 basis points higher (the latter number being a rough guess).

Don't let the drop in LIBOR fool you, a credit freeze is still on.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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