Something Funny In Credit Markets…

Credit guys I talked to were not as sanguine as equities guys. Instead of calling “the bottom is in”, they are not enthusiastic at all. Some of the more pessimistic bankers suggested that the market is now headed for a crash within weeks according to the Telegraph.

In the epicentre of the crisis (i.e. Europe), costs of insuring banks’ debts have been surging to new high, surpassing the 2008 crisis (via PragCap). Costs of insuring the debt of RBS, for instance, has hit an all-time high according to the Telegraph, and the FX swap market is showing that the European banking system is under stress. Earlier, of course, CDS for Bank of America surged before Warren Buffet bailed out the Bank.

Bond King Jeffrey Gundlach thinks there is “something funny is going on in the world of corporate bonds now — something looks broken” according to Bloomberg. He thinks there is “less willingness all of a sudden to be lending money to corporations”. As a result, he likes cash, and will be waiting for buying opportunities only when there is enough fear.

Below are a few charts for your consideration, which show the option-adjusted spread of corporate bonds as well as high-yield bonds compiled by Bank of America Merrill Lynch. Although the US is not in the centre of all the concerns, the spreads are rising.

Source: Bank of America Merrill Lynch, St. Louis Fed

If the stock market is the last to know as Makro trader suggested, is this something ominous?

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.