Until this past year, many in the mainstream media seemed to think that the stock market was the only true barometer of which way the financial winds were blowing.
In contrast, the fixed-income market, despite its much larger size and its absolutely critical role in greasing the wheels of a credit-dependent economy, was often ignored, unless there was a big move in yields in response to unexpected economic data or the Fed had stepped up the pace of its monetary interventions.
However, it has been the credit markets that have correctly anticipated and delineated the tsunami of financial destruction that has reverberated throughout the financial system and the economy.
Based on the following report from David Gaffen at the Wall Street Journal's MarketBeat blog, "Write-Downs, Right Down to the Ground," it looks like the coupon-clipping types are calling for another dangerous go-round -- like we saw a few months ago -- in the period ahead.
Is it March all over again?
Most investors thought that, after the blow-up of Bear Stearns Cos. as the winter ended, the credit markets would finally recover, owing to the various creatively-named Federal Reserve facilities (TAF, TSLF, et. al.), and the risks yet to be confronted would pale in comparison to the Bear debacle.
It hasn’t turned out that way. While the strain in the credit markets still falls short of the explosive environment of mid-March, the current malaise is in a sense, more depressing, as it can be attributed directly to broader U.S. economic problems.
The CDR Counterparty risk index has risen to levels not seen since March. (Source: CDR)
As a result, a key index of the health of the banking companies suggests more concern than at any time since late March, the aftermath of the Bear situation. An index of 15 counterparties (made up of banks and brokerages) formulated by Credit Derivatives Research that tracks the credit-default swaps of those firms is at its widest level since the end of March.
This index has been steadily rising since the middle of June, and of late was traded at 147.8 basis points, according to Dave Klein, manager of CDR Credit Indices.
