According to a new Bloomberg survey, the world wide CreditCrunch™ appears to be slowly fading away.

You might be wondering what the heck is this CreditCrunch? There has been a lot written on the subject, but not too much explained at a basic level. So here goes…..

The current issues with credit is that it has become more expensive. What does that mean? Well, essentially it means that the funding of lower credit investments have become more expensive. Why? Because people were afraid of risk and wanted only the safest investments. Treasury Bills (T-Bills). 

T-Bills are government issued short term investing products (less than 1 year) that are virtually riskless as they are backed by the taxation power of the government. There is also a limited supply available to investors. So when everyone wanted these products, the price skyrocketted and the rate of return dropped like a rock.

Now lets look at what happened to a lower credit investments. Lets use GICs or CDs (Cdn/US equivalents). Banks love to sell GICs and CDs. They provide great liquidity for loans and they are easy to sell to investors as they usually have some form of insurance. However, when less people want to invest in the product because they prefer T-Bills, banks have to compensate by offering higher rates, increasing the difference between the rate of return of a treasury bill and GIC/CD. Since they are offering a higher rate of return to investors, the bank will also have to demand a higher rate of interest from lenders.

But wait! You might be asking yourself: “If this is true, then why the heck are my GIC/CD rates been so crappy!

You have to understand that everything is relative. Look at the following sets of rates:

• Set A: T-Bill Yield 2.2%  - GIC/CD Yield 3.00%    
• Set B: T-Bill Yield 0.5% - GIC/CD Yield 1.7%

Normally the market should function with Set A’s rates. During a credit crisis, we find the market spread, or the yield difference between T-Bills & GIC/CDs has widened to almost double the prior amount. So even though your GIC/CD rate of return in Set B is lower than Set A, the premium interest you receive compared to a T-Bill has increased.

Did I make it simple enough for you?