C.M.O. 2.12.2010
Credit Market Overview
February 12, 2010
CDS spreads for the CDX investment grade index bottomed at 76bps on January 13th of this year. They rose fairly quickly to 84bps on 1/19 stalled for a day and then shot through the 86bps level that was a last rally attempt before the lows were reached.
The next level of 96bps was first touched on 1/25 and then again on 2/1. In technical parlance this can form what is known as a double top and spreads retreated from that level, closing at 92bps on 2/4. From there, however, it was clear sailing all the way up to the 106bps level on 2/9. The past few days have seen a retracement down to the 98bps level, significant because the 100bps level has proven to be a Maginot Line of sorts, similar to 10,000 on the Dow.
Stocks, as tracked by the S&P 500 peaked on 1/19 at 1150.23 sank to 1056.74 on 2/8 and have moved higher since closing at 1078.47 last night.
Levels between 100bps and 110bps in the CDX investment grade index initially proved to be support and then resistance so it will be important to see where spreads move from here.
The relationship between credit spreads and equity movements has been both led and lagged as the bombardment of exogenous macro factors leaves little room for individual company dynamics to assert themselves.
If spreads stay below the 110bps level and empirical evidence holds true the negatively correlated movement between spreads and stocks should allow for a move higher in the latter.
Fear and greed have made most market movements over the last 2+ years a binomial function raising or lowering equity prices en masse based on governmental decrees, fiscal intervention and macro economic quakes.
The current focus of the world is on whether Greece will grease the skids towards the next global implosion. The markets seemed somewhat hopeful yesterday and the sale of sovereign debt by Portugal appeared to go well.
To predict where things move from here would require the same talent as picking the 5 numbers you need to win the Lottery. If I had that, you wouldn’t be reading this.
Enjoy the weekend.
Jim Delaney
