Credit Default Swap Update

From Big Picture: Credit Crisis - Signs of Progress

Junk bond yields remain at high levels, as shown by the Merrill Lynch US High Yield Index. However, a slight decline of 200 basis points has taken place since the Index’s record high of 2,182 on December 15. This means the spread between high-yield debt and comparable US Treasuries was 1,982 basis points by the close of business on Tuesday. With the US 10-year Treasury Note yield at 2.18%, high-yield borrowers have to pay 22.00% per year to borrow money for a ten-year period. At these rates it is practically impossible for companies with a less-than-perfect credit status to conduct business profitably.

Barron’s Confidence Index: This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. A declining ratio indicates that investors are demanding a higher premium in yield for increased risk. The Index is at an all-time low, indicating a lack of confidence in the economy.

The graphs of the CDX indices are shown below:

CDX (North America - High Yield) Index

Since a month ago the cost of insuring against government bankruptcy through CDSs has risen for all but nine countries in Bespoke’s list of 38 countries. The table below shows the current
CDS prices, together with month-ago and start-of-year prices.

Argentina, Venezuela and Iceland have the highest default risk. Interestingly, Germany, Japan and France all have a lower default risk than the US at the moment. It now costs $67 per year to insure $10,000 against US default for the next five years. “While this may not seem high, it was at $8 earlier in the year, and $36 one month ago,” said Bespoke.

As shown in Bespoke’s table below, the UK, Greece, the US, Austria and Australia have seen default risk rise the most over the last month. Notably, the US has risen by 87%.