Corporate bonds

Risk appetite is returning in the markets. Everybody says: ‘yes we know’. But do we realize the consequences? No. Because we can’t. The best we can do is guessing.
In the mean time we observe that corporate credit is back. The US CDX five year investment grade index is now on levels prior to the Lehman debacle. The spreads have tightened sharply.
This goes to the expense of another segment of the credit markets: government bonds. Rates went up last weeks.
We know it’s the intention of the FED to keep rates in this asset class low. So will this lead to another round of quantative easing. We place a positive bet on that one, this afternoon at Paddy’s.

We don’t know if this is a positive sign. Unprecedented money creation is causing this ‘normalization’ which is not for real anyway…

To illustrate we mention this morning news, coming from Belgium and illustrating that not all is well with European banks so far:

Business newspaper De Tijd is reporting that the Belgian government is working on a new rescue plan because KBC - market value €8bn - is set to write down the value of its CDO portfolio by a further €1bn. This fresh hit seem to have been triggered by a downgrade of bond insurer MBIA.

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The New Normal

In the New Normal world the economic health of economic agents is measured by CDS-levels (credit derivatives swaps). As governments are taking up more and more corporate risks on their balance sheets, it’s important to keep track with sovereign CDS levels.
Not that much decent information is available concerning this topic. Credit Derivatives Research has launched a government risk index which aggregates the sovereign risk of the G7 nations.
Let’s strip the US of that AAA rating.

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