C.M.O. 6.16.2009
Credit Market Overview
June 16, 2009
When someone is on life support the discussion regarding whether or not to remove them portends something very bad or reasonably good. The world’s financial markets were in a very bad way for all of last year and most of the 1st quarter of 2009. Since then ample media attention has been paid to signs that things might be stabilizing. Banks raising capital in the debt and equity markets without explicit government guarantees (unfortunately, the implicit guarantee is now a fixture) and the back half of the BRIC nations reporting positive GDP growth; 5.8% for India and 6.1% for China
Going into this past weekend’s G-8 meeting there were reports in the media that the discussions of exit strategies from the various stimulus efforts were at least one of the topics that would be discussed during the confab.
Germany, ever mindful of the ravages of inflation, was the most hawkish going into the meeting with their central bank head, Axel Weber, saying “Raising interest-rates levels as a precaution certainly is a challenge from a communication point of view, but one that can be mastered”. Luxembourg’s, central bank governor, Yves Mersch, sided with Axel suggesting that while he “was inclined to let the bank’s (ECB) recent cuts sink in”. He also stated that “It’s not enough to have elements of an exit strategy for each instrument, you need a comprehensive picture. And after having done what was needed to be done, we are now trying to get a more comprehensive picture.”
With these statements being made well in advance of the weekend’s meeting it seemed at least a little strange that the market would sell off beginning in Asia and continuing around the world yesterday. One would have thought that a consensus by the world’s leading central bankers that things are improving enough that they could actually begin to consider how to remove their meddling fingers from the markets would have been something the markets would be all to happy to hear. One has to wonder whether it will be considered such after some deliberation.
It seems akin to that day when the training wheels are taken off and you move on to riding on two wheels and not four. In the end you know it’s going to be good; it’s just that getting there is a little scary.
The sovereign CDS level for Germany peaked at 92bps on February 24th of this year and fell most recently to a low of 23bps on May 11th. It closed yesterday at 35bps. America’s CDS’s also peaked on 2/24 but at 100bps and then got as low as 26bps on 5/12 following a similar path, with regard to peaks and valleys, as Germany’s CDS’s.
Prior to 2008 the U.S. CDS level hovered around the 8bps level while Germany’s fluctuated between 2bps and 13bps.
Enjoy the week.
Jim Delaney
