Posted on 02/23/2009 9:23:23 AM PST by quesney
Red lights are flashing in the credit market again.
The revival in risk appetite seen at the start of the year is fading as long-awaited government bailout plans have failed to materialise. The common thread is renewed pressure in a banking system already severely weakened by 18 months of financial markets turmoil. Governments are running out of time to stop the rot before the credit crisis takes another lurch for the worse.
First, consider the spread between U.S. dollar Libor, the rate for interbank lending, and the overnight indexed swap rate, which captures expectations for official interest rates. The spread narrowed sharply from October's peak of 366 basis points to a low of around 90 basis points in January. But now the spread has risen again to back over 100 basis points, amid renewed fears over bank funding and a further loss of trust in the system. Pre-crisis the typical spread was under 10 basis points.
Second, look at the Markit LCDX index of default swaps on 100 U.S. leveraged loans. The index rallied in January, but has now returned to 72.5% of face value, close to the record low seen in December. Auctions to determine swap payouts are producing very low indicative recovery rates: 40% versus an average recovery rate over the past 20 years for bank loans of around 81%. Low recoveries will hit loss reserves hard.
Third, spreads on nearly all tranches of the CMBX index, which tracks default swaps on 25 U.S. commercial mortgage-backed securities, have reached new record wide levels in February after a January rally. Moody's on Feb. 5 said it was considering cutting ratings on $302 billion of CMBS due to falling commercial property values and rising delinquencies.
(Excerpt) Read more at online.wsj.com ...
Although I am surprised people really thought words like inflation and deflation were around in Jeffersonian times ....I guess Biden is not the only one with a warped historical perspective.
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