Counterparty Risk Easing: CDS Spreads Decline

BCA Research CDS Spreads DeclineAccording to BCA Research, CDS spreads declined sharply last week, further indicating that normalization of inter-bank lending could develop. CDS spreads tend to lead the corporate bond market, where high yield spreads have recently reached record levels. A reduction in corporate debt spreads in general would come as a relief as the thawing of credit markets is highly aniticipated as a sign that bailout efforts are working.

The BCA chart features the CDS and corporate debt spreads of bank issues only versus the 10 year treasury and policy rate expectations, which indicate spreads on bank debt recently hit an alll time high of around 600 and have only recently pulled back, but slightly.

The Fed will have to provide more assurance that policy rates will remain low, as a recent uptick in the 10 year treasury yield has offset some of the reduction in spreads.

BCA adds that bailout efforts need to proceed to ensure that the banking system starts functioning again.

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