Default Risk at New Highs - Scary but Not Surprising

Credit default swaps that measure default risk for investment grade debt are trading at their highest levels of the bear market.  Below we highlight an index that measures default risk for 125 companies with investment grade debt ratings.  Just as the stock market made new lows yesterday, default risk made new highs.  Fear is gripping the markets, and nothing the government or anyone else has done thus far has helped alleviate this fear.

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Comments

[Geoff Consi...:]

There is an interesting factor here. CDS's are related to VIX levels---implied volatility levels are highly correlated to CDS spreads. As much as anything, the CDS spreads are simply following VIX levels--which may or may not be very rational in the current market. JNJ has annualized implied volatility for Jan 2010 options of mid 30's--vs. mid 40's for the S&P500 (this was before today--not fresh quotes). Does this make any sense? implied vol at this level corresponds to implied default risk that is quite high--what would have corresponded to junk earlier this year. There are many more examples. Implied vol is simply way out of whack for the longer-term--the implied default risk shows irrational fear. Am I willing to bet that JNJ does not have this level of default risk? You bet I am. The market implied vol levels suggest that many historically stable companies which are weathering the downturn just fine have substantial default risks. This is irrational panic.

2008 Nov 20 06:50 PM

[PainfullyAware:]

Irrational Panic Or Consideration Of A Larger Data Set?

There is a lot more going on than just the Money Mayhem.

Most governments are preparing for civil unrest and the possibility of war over scarce resources.

The light at the end of the tunnel appears to be the oncoming train.

Still, the random element is humanity. Those Blighters Never Seem To Do What One Would Expect. Lets hope that the righteous get control again.

For now Prepare for the worst and Pray for the best. We have a long way to go before this sorts out.

2008 Nov 21 04:40 PM