Uneasiness in the Credit Markets

The credit markets are pricing in the uncertainty caused by fear of a European debt crisis which will cascade into banking failures.  Some of the market reactions are:

Spreads Up/Prices Down

• In the credit default swaps (CDS) market, the bid-ask spread has risen to 5.4% from 3.0% of the annual cost of the contracts on the 15 most traded CDSs on US investment grade companies.  The 3.0% figure is from August 1, 2011.
• The Bank of America Merrill Lynch Global Broad Market Index has reported that spreads on bonds have increased from 170 basis points at the end of July to 231 basis points.
• The Barclays Capital Global Aggregate Corporate Index has an absolute yield of 3.82%, up from 3.67% on August 19th.
• The Markit CDX North America Investment Grade Index has risen to 122 basis points from 96.3 basis points in August.  This index increases as investor confidence improves.
• The Barcap CMBS Super Duper Index has a relative yield of 3.03% compared to 2.13% on July 25th.
• The Standard & Poor's/LSTA US Leveraged Loan 100 index is down 4.7% in 2011.

Investors have de-risked their portfolios by moving out of the leveraged loans and distressed debt.  Banks are continuing to close down their proprietary trading desks and lowering their exposure to corporate debt.  They are not committing capital to facilitate trades or acting as a principal.  There is less liquidity in the market because of these factors.

The source for this article can be accessed here.