Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Corporate Bonds, Derivatives, and How They Wag the Equity Markets

By

To more accurately guess the primary direction of equity markets, there are better places to look to than stocks themselves.

PrintPRINT


Moves in sovereigns' CDS are also a general precursor to swings in the underlying bonds, partly because they insure those bonds, but also because CDS offer macro funds a leveraged way to express directional positions. I've put together my own little index of CDS, which includes both shaky nations as well as Germany. You can see from the chart below that in the aggregate CDS, levels are higher than pre-2008 crisis, but well off the highs, and they are generally stable.


Click to enlarge

So, in the aggregate, EU bonds and CDS don't look healthy nor do they look terminal.

Of course, the EU spasms concern us only to the extent that they impact our financial system or our economy. To monitor if that is happening, I track an index of CDS on bonds of large US financial companies. Our big banks -- JPMorgan (JPM), Morgan Stanley (MS), Goldman Sachs (GS), Bank of America (BAC), etc. -- is where EU problems would metastasize first. Of course, these CDS would also warn us of any renewed "homegrown issues." Broader non-financial CDS indices such at the Markit CDX.IG 18 can also add color. As you can see below, things remain boringly steady for now.


Click to enlarge

Lastly, the two-year swap spread and CDS on US debt represent the "contagion warning system." While at times macro players have attempted to mess with US CDS just to spook the markets, bona fide spikes have occurred only during times of true stress, and have been concurrent with jumps in the two-year swap spread. When these two measures start "misbehaving," they tend to signal that not only are there stresses within our financial system, but those stresses have the potential to become systemic. As one may predict by glancing at our "boring" big financials' CDS, US CDS show no signs of concern and two-year swaps are trading remarkably tight.


Click to enlarge


Click to enlarge

Positions in SPX
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE