American credit market outlook

Credit spreads of US homebuilders have rallied in recent weeks but may slow down even as the housing market shows early signs of stabilising.
Fears of a worse-than-expected US housing downturn have begun to dissipate in recent months, making it more likely that the cost of protecting homebuilders' debt with credit default swaps will either hold steady or fall slightly in coming weeks. "Credit spreads have recovered as much as they're going to for the foreseeable future," said John Tierney, a credit strategist for Deutsche Bank in New York.
Evan Mann, senior high yield analyst at New York-based Gimme Credit, agreed. "I think spreads are just going to hover where they are for a while. Probably until the spring," he said.
The spring selling season accounts for an estimated 66 percent of annual home sales, according to CreditSights analyst Sarah Rowin. Equity investors have been more optimistic than bond market investors. Homebuilder shares rose late last week after Bank of America analyst Daniel Oppenheim said the home-buying market, which has been on a downward spiral for about a year, has already bottomed out.
Freddie Mac chief economist Frank Nothaft on Friday said "housing is about two-thirds of the way through the correction and should stabilise by mid-year 2007."
Despite declining home sales, research firm CreditSights said it is keeping a marketweight recommendation on homebuilders' bonds, saying reasonable mortgage rates and healthy employment will support housing demand over the long term.
The average cost of protection for investment-grade builders fell 4 basis points in November, CreditSights said, to approximately 65 basis points, or $65,000 annually to insure $10 million of debt for five years.