Signs of recovery in credit markets
Barron’s sees recovery in credit markets where others, most notably RBS, are bearish. Who’s right? Let’s hope Barron’s. But, only time will tell.
Barron’s had this to say:
[Looking at] eight important credit-market indicators [the swap, credit default swap spread, Fannie Mae, Treasury Euro Dollar (TED), paper-bill, asset-backed, emerging-market, and junk-bond spreads] and their current position against their respective peaks in March, in every case, spreads are down quite sharply, meaning the rise in Treasury yields from the cycle lows on March 17 has been an important signal of declining systemic risk.
Some spreads have improved more than others, and most remain above historical averages, so we can’t say we’re out of the woods on the credit crisis just yet.
Hi Ed, love your stuff…keep it up…Thought I would add my $0.02 worth on this one…Barron’s is wrong! Look at FF-ED spreads for Dec08 – yeah, they’re in a bit but still way wide, Super Senior tranche spreads remain wide (indicating a strong underlying belief in institutional circles that systemic risk remains and is high), CDS levels on IG are around 120bps (yes tighter than recent wides BUT way off traditional norms and still tight to a recessionary environment), HY CDS are hovering around 600bps (same as above but definitely pricing ion at least 30-40 defaults in the next few years among the 100 names in the index), as far as FNM (ignore the absolute level of Senior CDS – look at the Senior-Sub differential – Seniors are supported by govt guarantees (kinda) but Subs arent – the Sen-Sub duifferential has been widening conswiderably recently, emerging market bond/CDS spreads are way wider (example Argentina!). I know, I know, BUT come on Barron’s (and by the way, i don’t work for RBS but tend toi agree with some of their cataclysmic thinking). One more thing, with tonight’s final AAA mopnoline downgrade, Munis have been pushing wider recently and MCDX is probably going to open up wider tomorrow – is the credit crunch/crisis really over? I saw something in WSJ this week about a counterparty risk index – I bet that is jumping higher as we see LEH and MER popping back up today…wow, i ranted a lot longer than i thought i would. CT
sorry – one more thing – check out the last 2 TAF results – bid-to-cover rising, and stop-outs well off 1M OIS – someone is in need of that money pretty bad and i think we all know who…what happens when they take this TEMPORARY support away (as per Paulson today?)…CT
CT, you know what you’re talking about. As much as I would like to believe what Barron’s says, all other measures of risk are fairly elevated. I think a trader I spoke to was even joking about The Bundesbank comments on the eve of the ’87 crash saying he hopes central bankers are more circumspect this weekend!
Tat demonstrates the level of anxiety on the street. Even the VIX has come back to life:
https://finance.yahoo.com/echarts?s=^VIX#chart1:symbol=^vix;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
There is a general flight to quality as you suggested. I used to work on a HY desk and it reminds me a bit of 1998 after the Russian devaluation. Bid-ask was huge and no one was trading. Liquidity was zero.
I haven’t heard what Martin Fridson has said about all this but I know that earlier this ear he was warning that HY defaults would rise.
From where I sit, things are as bad as they were pre0Bear collapse. Something is going to happen soon. And your quotes from vastly disparate markets makes it obvious that we don’t know where the next time bomb is ticking.