Fed Fails to Restore Creditor Confidence

October 2 2007 Bloomberg.com As far as the world's biggest bond investors are concerned, the Federal Reserve is failing to restore confidence in the U.S. credit markets. The central bank's decision to lower the overnight lending rate between banks by half a percentage point last month won't prevent the economy from slowing or corporate defaults from increasing. Last month's rally in high-yield corporate bonds, the biggest since 2003, may fizzle by year-end. While indexes of derivatives that measure the risk of default show increasing investor confidence, the difference between the interest that banks and the U.S. government pay for three-month loans is wider now than a month ago. That's a sign the Fed's Sept. 18 rate decision has yet to persuade bondholders that lower borrowing costs will stop "disruptions in financial markets'' from hurting the economy.

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