The European CDS benchmark, the iTraxx Crossover index, broke through the 1,000bp barrier for the first time in its four year trading history on Wednesday, meaning it would cost €1m annually to protect €10m of debt issued by mostly junk rated companies over a five year period. About 40 per cent of the underlying constituents of in the index are now trading over 1,000bp, and most of these are trading upfront, Markit data show.
The extent of the deterioration and the fact that so many of the consituents are themselves trading in distressed territory suggests the gyrations in the index are not just technical, according to Markit credit analyst Gavan Nolan.
Or, as Chris Williamson, chief economist at Markit, said
[The widening] points to heightened concern over corporate solvency. Fears of default on corporate debt have risen sharply in line with the growing realisation that the economic downturn continued to gather momentum in November. Today’s release of the Markit Eurozone PMI – which collapsed to a record low in November – suggests that no signs of a bottoming out are yet evident, pointing to a longer and deeper recession than previously thought.
But the CDS market isn’t the only one pricing in some form of economic and financial Armageddon.
The current spread between junk-rated bonds and Treasuries implies a US default rate of 21 per cent, higher than the record set during the Great Depression in 1933, John Lonski, chief economist at Moody ‘s Investors Services, told Bloomberg televison.