C.M.O. 4.22.2009

Credit Market Overview
April 22, 2009

Throughout the various stages of the global implosion in credit, liquidity and confidence there have been certain periods where the markets were said to have “decoupled”. In some instances that referred to the different markets within the U.S. e.g. stocks from bonds and at other times the U.S. markets as a whole from those in the U.K. and Europe. The latter by which, it was hoped early on, would get through the crisis unscathed while the demon credit mongers of the U.S. boiled in their own stew of suppurating securitized slop with rapidly rotting ratings.

Fast forward to the markets of the previous three days. On Friday the S&P closed at a six week high having risen every week in between. A streak to say the least! The much watched VIX closed at 33.94, a level not seen since before LEH went the way of the Dodo last September. Oil was up on the day and still within its $52-$56/bbl range basis the June contract on hopes of continued economic expansion. The Dollar had gained back most of what it lost against the Euro in late March and the Euro/Yen, a way to measure speculative tolerance in the other safe haven currency (JPY) without clouding the picture by including the Greenback, was falling confirming the move in the USD and that risk was once again righteous!

CDS spreads had joined the party too coming in from 1429bps and 201bps on the Hi Yield and Investment Grade CDX indexes respectively on April 1st to close Friday at 1247bps and 177bps keeping the same order moves of -12.7% and -11.9%.

On the other side of the pond the FTSE closed on its highs for the week just a hair’s breath from its most recent high close on April 2nd while the DAX beat its previous high set on February 9th by 10 index points to close at 4676.84.

The weather on Saturday seemed to cooperate as well with many New Yorkers sporting shorts and flip flops for the first time this year.

Enter Monday. CDS spreads shot up 42bps on the Hi Yield side and 9bps in Investment Grade land, the S&P dropped 37.21 points down 4.2% on the day. The Dollar lost close to 1¼ big figures vs. the EUR and EUR/JPY dropped over two points and more than 2%. Oil, having settled above $52/bbl basis the June futures on Friday lost $3.96/bbl or ~7.5%. The DAX lost 190 points or over 4% of its value and the FTSE re-crossed the 4000 level from over to under losing just about 102 points and just about 2.5%.

And the weather??? Walking around NY on Monday was like riding through a car wash with the windows open only the water was cold!

Yesterday was “recoil” day. Stocks here and abroad along with oil were up as was EUR/JPY. The VIX relaxed a bit falling below the 40 level inked into investors’ minds as the Maginot Line between good and evil. And yes, the rain stopped and the streets were just about dry for the evening commute.

The trick here is that credit spreads did not fall yesterday. They continued their rise from Monday. The Hi Yield number is now back over 1300 and the Investment Grade index added 2.3 points and 1.2% to close at 189.1.

Of all the changes described above that the CDS market’s move was in such tight synchronicity with the other, more reactionary markets, for two consecutive days is something rarely seen. That it did not participate in yesterday’s recovery is reason for pause. Given that the lead lag time between the CDS and equity markets can vary 20 days on either side of “coincident” means that it is something to be watched but not necessarily worried over, at least not yet.

Enjoy the week.

Jim Delaney