Evidence of Green Shoots....NOT

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Corporate Credit Slumps Most Since March on Concern for Economy
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By Bryan Keogh and Abigail Moses

Aug. 17 (Bloomberg) -- Corporate credit slumped on concern a five-month credit market rally is “unsustainable” as Japan’s economy grew less than economists estimated and U.S. consumer confidence fell.

Yields relative to benchmark rates on U.S. corporate bonds jumped the most since March, while credit-default swaps tied to investment-grade debt rose to an almost-four-week peak. Contracts on JPMorgan Chase & Co. and Goldman Sachs Group Inc. debt climbed to the highest levels in a month, according to CMA DataVision.

Investors are concerned the recovery in Japan’s economy, which emerged from its deepest postwar recession in the second quarter, will falter once governments worldwide complete $2 trillion in stimulus spending. Speculation the U.S. consumer will help revive global growth was dented last week when a confidence index fell to the lowest since March.

“While there is a rebound in economic activity, consumption is still impacted,” Philip Gisdakis, a Munich-based strategist at UniCredit SpA, wrote in a note to investors today. “This problem will not disappear in the short term and indicates that the current recovery might not be sustainable.”

Equity markets also slumped, while Treasuries gained, as investors snapped up safer assets. The MSCI World Index of 23 developed nations sank 2.8 percent, the most since April 20, while the Standard & Poor’s 500 Index slid 2.4 percent after China’s Shanghai Composite Index slumped 5.8 percent, the most since November. The yield on the benchmark 10-year Treasury note dropped to 3.47 percent, the lowest in more than a month.

Perceived Quality

The extra interest investors demand to own U.S. corporate bonds rather than Treasuries jumped 7 basis points, the most since March 30, to 387 basis points, according to Merrill Lynch & Co. index data. Spreads on Merrill Lynch’s broadest index of investment-grade and high-yield debt have widened for the five past trading days, snapping a 20-day narrowing streak. A basis point is 0.01 percentage point.

Credit-default swaps on the Markit CDX North America Investment-Grade Index, linked to 125 companies in the U.S. and Canada, jumped 6.2 basis points to a mid-price of 123 basis points as of 4:30 p.m. in New York, the highest since July 22, according to CMA. An increase in the benchmark index signals a deterioration in the perception of credit quality.

The CDX index has climbed about 18 basis points since Aug. 7, when it reached a 14-month low amid economic reports signaling the recession may be ending.

Bank Credit-Swaps

Contracts on JPMorgan, the biggest U.S. credit-card lender, rose about 5 basis points to 81.6 basis points, the highest level since July 16, according to CMA. Credit derivatives tied to debt of Goldman Sachs gained 10 basis points to 150 basis points, the highest since July 13, CMA prices show.

Credit swaps on Citigroup Inc. jumped 21 basis points to 298 basis points, the highest since July 29, according to CMA. All three banks are based in New York.

A basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

In Europe, credit-default swaps on the Markit iTraxx Crossover Index of 44 companies with mostly high-yield credit ratings increased 26 basis points to 631 basis points, the highest since July 29, according to JPMorgan prices in London. The index reached a peak of 1,173 basis points in March.

‘Markets Are Reacting’

Japan’s gross domestic product expanded at an annual 3.7 percent pace in the three months through June, less than the median estimate of 3.9 percent growth predicted by 22 analysts surveyed by Bloomberg News, as unemployment approaches a record high. The Reuters/University of Michigan preliminary index of consumer sentiment dropped to 63.2 this month from 66 in July.

“The global markets are reacting to some weaker-than- expected economic data from Japan,” strategists led by Dean Curnutt, president of Macro Risk Advisors LLC, a New York-based firm that advises institutional investors on derivatives strategy, said today in a report. “Many are welcoming today’s sell-off as a needed correction after the equity market entered ‘euphoria’ territory on many indicators.”

The Markit iTraxx Europe index of 125 companies with investment-grade ratings climbed 4 basis points to 98.75 basis points, JPMorgan prices show. The cost of protecting bank bonds from default also rose, with the Markit iTraxx Financial Index of 25 European banks and insurers up 4.5 basis points to 97.5 basis points and the subordinated index 9 basis points higher at 184 basis points.

Spreads Widen

The cost to protect against defaults on high-yield, high- risk bonds also increased. The price of the Markit CDX North America High Yield Index, which is linked to the junk-rated debt of 94 companies and falls as the cost of protection rises, fell 1.5 percentage point to 86.685 percent of face value, according to CMA.

Investment-grade bond spreads widened 4 basis points, the most since March 9, to 258 basis points, according to Merrill Lynch data.

The extra yield investors demand to own junk-rated debt rather than Treasuries jumped 23 basis points, the most in two months, to a two-week high of 917 basis points today, after climbing 37 basis points last week, its first weekly increase since the period ended July 10, according to Merrill Lynch index data.

 

What green shoots? Commercial real estate is collapsing into bankruptcy.

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Fed Extends TALF Program for Commercial Real Estate (Update2)
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By Scott Lanman

Aug. 17 (Bloomberg) -- The Federal Reserve extended by three to six months an emergency program aimed at restarting credit markets, a move that may cushion the commercial real- estate industry from rising defaults and falling prices.......

 

And the auto sector.


Green shits!!!!