US Corporate debt not joining the equity rally - be aware

* US senior bank debt at its widest since the Lehman collapse
Looking at the underlying assets the US banks hold, I note the following;
- Corporate defaults are surging; The S&P by March 20th had recorded 47 defaults globally, which is three times the default level for the same time period in 2008.
- Leveraged loans as measured by the LCDX index remains close to it all time lows at 74% of nominal.
- Commercial mortgagebacked securities has rallied sharply over the last week which of course is positive.

According to a Deutsche Bank calculation, the USD investment grade corporate bonds were pricing in a five -year default rate with a 40% probability assuming average recovery rates. As a reference; the worst five - year investment grade default rate since 1970 is 2.4%, with the average at 0.9%,,



*"Dirt cheap" corporate debt - money is being pumped in, but no rally - not good

With investmentgrade debt absurdely cheap and investors pumping money in - where is the rally? Stock market bulls should sit up and pay attention - this is not a good sign. Main reason this bond rally is not taking off is the lack of demand for financial debt.

Demand is mainly for nonfinancial debt where buyers are met with a wall of supply. Borrowers are bypassing the banking system which in turn prevents the spreads from tightening. Financial debt guaranteed by governments are still finding buyers, but it is hardly a vote of confidence.
Assetbacked securities and leveraged loans still remain unloved. Without a sustained improvement in credit markets the risks to the current bearmarket rally will increase.


As always, good luck





The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.

Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.