C.M.O. 6.22.2009
Credit Market Overview
June 22, 2009
CDS spreads paused in their recent moon shot on Friday with the Hi-Yield index taking on just 7/10ths of a point or an increase of about 0.06% and the Investment Grade index falling 9/10th of a point or 0.63%. Small numbers yes, but in the context of a move from 926.2 on June 2nd in the HY index to 1043.9 on Friday the small rate of change between the two days is worth noting. The recent low in the IG index was 120.6 on June 5th; with last Thursday’s close of 142.0 you can see there was an equally vicious rise in both indices.
To give you some perspective on this I am going to borrow from a recent missive put out by David Rosenberg, Chief Economist & Strategist for Gluskin Sheff in Toronto but whom you are probably familiar with from his days at Merrill Lynch. David put a graphic in a recent piece that shows where Baa Corporate bond spreads were, in basis points, at the time of some notable economic events in America’s history. Dave listed them chronologically but my point is a little different than his was so I sorted them in descending order with the widest one on top. As mentioned all the numbers are in basis points. (To prevent the blog from blowing up I’m doing this sans table.)
1932 Great Depression 724
2008 Credit Crunch 611
1975 Inflation/Recession Scare 413
2002 Enron/WorldCom Crisis 390
1937-1938 Depression Relapse 381
1982 Penn Square Bank Failure 377
2009 Right here, Right now 374
2001 9/11 Terrorist Attacks 353
1980-81 Recession/Lat Am. Crisis 329
1970 Recession 315
2001 Tech Wreck 306
1998 LTCM Crisis 277
1987 Stock Market Collapse 268
1990-91 Recession/Real Estate Crisis 239
1973 OPEC Embargo 221
1995 Tequila Crisis 180
1997 Asian Crisis 175
1962 Cuban Missile Crisis 113
Now that the numbers are posted here are the answers to some of the questions you might be asking:
There are 18 events in the list and the average spread is 335bps, the median spread is 322bps so they are not that far apart.
There is a 611bp range between the widest and the narrowest and where we are “Right here, Right now” is about 52% or a tad more than halfway to the top.
Keep in mind, as well, that this is not half way between the lows seen in 2006 and the highs of the Great Depression but halfway up a list of some if not “the” greatest economic disasters this country has ever faced.
I’m not sure there is any indication from this list as to where spreads will be this coming Friday but in historic context there were only six other times (per DR’s list) that spreads were wider than this.
One of the things this past crisis taught us is that when things get out of whack, they can get really, really out of whack. As a “relative” calm returns it would seem that the probabilities favor a move towards narrower spreads. As always, no promises, no guarantees and, as they say, trade the market you have, not the market you wish you had.
Enjoy the week,
Jim Delaney
