Loan Terms, Bond Yields Buttress U.S. Economy: Chart of the Day

Standards for bank loans and yields on corporate bonds are signaling the U.S. economy will avoid a recession, according to Michael T. Darda, chief economist and chief market strategist at MKM Partners LLC.

The CHART OF THE DAY compares the percentage of banks tightening credit for larger companies with the difference in yield between AAA rated and high-yield corporate debt, as Darda did yesterday in a report. The lending data come from a survey of senior loan officers by the Federal Reserve, and the latest results were released two days ago. The yield comparison is based on indexes from Barclays Plc’s investment-banking unit.

“The disposition of the credit markets and the behavior of lending standards have been very valuable guides” to the U.S. outlook, Darda wrote. These gauges suggest the economy “will continue to move forward” rather than shrinking, the Stamford, Connecticut-based economist’s report said.

Banks are more willing to lend to companies with annual sales of $50 million or more for the second straight quarter, according to the central bank. The gap between loan officers that said they are easing credit terms and those tightening widened to 9.5 percentage points from 6.9 points last quarter.

The yield gap between non-investment-grade U.S. corporate bonds and the highest-rated debt narrowed to 477 basis points two days ago from 532 basis points on June 30, according to the Barclays indexes. The smaller gap cut borrowing costs for lower- rated companies. Each basis point is 0.01 percentage point.

“U.S. credit markets remain liquid and essentially stress- free,” Darda wrote. “This tends to be associated with easing or steady standards for business lending, which is exactly what we saw.”

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net

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