Change In Credit Spreads By Sector

Hickey and Walters (Bespoke) submit: Earlier in the year, the consensus among investors, economists, and strategists was that subprime problems would generally stay confined to subprime markets and the financial companies that dealt in the paper. For a time they were right, but not anymore.

The top chart below shows the S&P 500 since October 2006, and the lower chart shows the date that credit spreads began widening and how much they have widened by for various sectors of the market. As shown, spreads on mortgage bonds were the first to get hit, followed by companies in the financial sector, including brokers, banks, and insurance companies. This coincided with the S&P 500’s peak in late February.

Following February’s sharp declines, the market stabilized and rallied, and at the time, it appeared as though the trouble in subprime would be confined. However, the sense of relief was short lived, as one by one, debt in different sectors of the market began succumbing to the downward pressure.

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