Thursday 6 May 2010

Sell in May and go away...

Very big day today on the credit markets as fear lead to some very significant widening in major credit indices.

Itraxx Main 5 year is now around 120 basis points, up from 85 bps a month ago, but up by around 20 bps just today!
Itraxx Crossover 5 year CDS widened by 70 bps in a single day as well.

Sovereigns CDS took some additional hits:

As well, all Senior Banks CDS are wider.

Banks are leveraged play on the economy as I keep repeating on this blog.

“The risk is for the banking sector because they’re the ones that own most of the government bonds and in cases of extreme crisis banks rely on governments to bail them out,” said Juan Esteban Valencia, a London-based credit strategist at Societe Generale SA. “If governments can’t issue at relatively normal levels, it’s going to be very difficult to bail out banks and that means banks are getting hammered.”

What has been worrying today is that Senior CDS widened more relatively to Sub CDS. This is concerning because it highlights liquidity strain in the system (TED spread widening). Senior debt is much larger than sub in terms of issued debt.

About the TED spread:

Equities are also feeling the pain and bank stocks have been heavily sold.

The second phase of the crisis is being played, after the financial crisis, we are experiencing a sovereign crisis and very severe crisis of confidence in the Eurozone which is reflected by the massive sell-off of the Euro we have seen in the last few days.

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