The Next Leg Of The Crisis
In its chart of the day, Bloomberg shows the recent performance of the iTraxx Financials CDS index. The index tracks the performance of 25 bank and insurers unsecured securities, and today, for the first time since the Lehman bankruptcy, the Financials index surpassed the iTraxx Euro Corporate index. According to Bloomberg the inversion is indicative of "systemic stress" in the financial system and increasing expectations by financial company bondholders that in the upcoming financial restructurings, unsecured notes will likely end up getting impaired.
“We’re seeing the start of the next leg of the crisis and that’s going to be financial bondholders taking a haircut as lenders default,” said Mehernosh Engineer, a London-based strategist at BNP Paribas. “There’s been a perception that banks’ senior bondholders are untouchable but that’s going to change. The crossing of the financial and corporate indexes “is clearly not a healthy sign,” according to Engineer. Solvency concerns mean that the distortion may continue, “a fact being reflected in cash bonds over the past month,” he said.
Of course, Vikram's memo today must have put all fears aside and made it obbviously clear to everyone just how stable the U.S. financial system truly is so it will be curious to see if the credit market (which somehow is still rational at least compared to its equity counterpart), at least as represented by iTraxx Fins, follows suit and tightens substantially tomorrow.
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