Friday, April 3, 2009

The Debts of the Spenders: CDX Spreads Narrow

Corporate bond spreads are finally beginning to show some improvement as they belatedly catch up to the equity rally. Slight improvements are apparent in HY (high yield) junk bonds while the IG (investment grade) trades at a narrowed basis pt spread.

The way to read these graphs is simple: spreads are inversely related to price. As the spreads narrow, or decline, index prices improve. The falling spreads go a great deal towards explaining what has been eluding equity T/A chartists - that despite remaining in overbought conditions the rally may persist for a while longer as SENTIMENT and investor psychology improves.

Trillions of taxpayer dollars pumped into the system are having a more pronounced effect.
Will it last? Hey -all it takes to produce fresh capital is a single push of a button by bureaucrats to mint fresh cash or monetize existing government debt. The end road of course is stagflation - little to no economic growth in the face of rising interest rates. Commodities do well in such an environment. Fixed income does not.

Source: Markit's CDX Indices

EDIT: In case you couldn't tell the HY is the one w/the bigger spreads. IG is the one w/smaller spreads.


Erik said...

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