Credit Markets Not Too Worried

Includes: IAI, IYF, XLF
by: Bespoke Investment Group

The financial sector has taken quite a hit over the last few weeks, after hitting a bull market high in early August. Based on our Bank and Broker CDS (credit default swap) Index, however, credit traders do not seem too worried about it.

Below is a chart of our Bank and Broker CDS Index, which measures default risk for the major financial firms around the world. Default risk for the financials typically spikes when stocks fall and vice versa. Throughout 2013, the credit markets have become as comfortable with financial stocks as they've been since before the financial crisis of 2008/09.

During the stock market pullback we saw in June, default risk picked up a bit, but during the most recent pullback, we've seen default risk trade sideways. Over the last month, the S&P 500 financial sector is down 4.47%, but our CDS Index is actually down 0.45%. Whatever the reason, the credit markets don't think there's reason to be concerned just yet.