The cost of insuring against default has been declining – what this may suggest
By Elliott Wave International
You may recall hearing a lot about “credit default swaps” during the 2007-2009 financial crisis.
As a reminder, a CDS is similar to an insurance contract, providing a bond investor with protection against a default.
In the past several months, the cost of that protection has fallen dramatically.
The November Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets, showed this chart and said:
The Markit CDX North American Investment Grade Index comprises 125 equally weighted credit default swaps on investment grade debts. It shows the cost of insuring against default on high grade bonds issued by the most liquid companies. When the index is low, as it was in January 2018 and January and February 2020, the cost of insuring against default is low, because investors view the nonpayment of debt obligations as most improbable. Ironically, this is when investors should worry. Each time the stock market fell, the Markit index surged. The index has subsequently declined toward the lower end of its historic range, indicating complacency yet again.
Free Reports:
Sign Up for Our Stock Market Newsletter – Get updated on News, Charts & Rankings of Public Companies when you join our Stocks Newsletter
Get our Weekly Commitment of Traders Reports - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.
This complacency toward default risk is occurring just as corporate bankruptcy filings are surging. As a matter of fact, the third quarter of 2020 was the worst quarter on record for U.S. bankruptcy filings.
Take a look at this Oct. 26 news item from Bloomberg:
Bond Defaults Deliver 99% Losses in New Era of U.S. Bankruptcies
Desperate to generate higher returns during a decade of rock-bottom rates, money managers bargained away legal protections, accepted ever-widening loopholes, and turned a blind eye to questionable earning projections. Corporations took full advantage and gorged on astronomical amounts of debt that many now cannot repay or refinance.
Now, keep in mind that all these bankruptcy proceedings – where many creditors are walking away with just pennies – are occurring during a time of historically low interest rates.
Imagine what will happen should rates begin to rise. It will become increasingly difficult for corporations to borrow at low rates AND service the huge amount of outstanding debt.
Let’s return to the November Elliott Wave Financial Forecast:
Increasing bankruptcies, debt restructurings and defaults are deflationary.
Are you prepared for a historic deflation?
Learn what you need to know to keep you and your family financially safe by reading the free report, “What You Need to Know Now About Protecting Yourself from Deflation.” Here’s a quote:
Many investment advisors speak as if making money by investing is easy. It’s not. What’s easy is losing money, which is exactly what most investors do. They might make money for a while, but they lose eventually. Just keeping what you have over a lifetime of investing can be an achievement. …
Protecting your liquid wealth against a deflationary crash and depression is pretty easy once you know what to do.
Find out how to protect your wealth during a deflationary crash.
Get started by following this link: ““What You Need to Know Now About Protecting Yourself from Deflation.” – free access.
This article was syndicated by Elliott Wave International and was originally published under the headline Bond Market: “When Investors Should Worry”. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
- COT Bonds Charts: Speculator Weekly Changes led by 5-Year & 10-Year Bonds Apr 28, 2024
- COT Stock Market Charts: Speculator Bets led by VIX & Russell-Mini Apr 28, 2024
- COT Soft Commodities Charts: Speculator Bets led by Corn & Soybean Meal Apr 28, 2024
- Today, investors’ focus is on the PCE Price Index inflation report Apr 26, 2024
- Gold price recovers amid uncertain US economic outlook Apr 26, 2024
- This “Bullish Buzz” Reaches Highest Level in 53 Years Apr 26, 2024
- FastSpring and EBANX Forge Partnership to Expand Pix Payments for Digital Products in Brazil Apr 25, 2024
- Target Thursdays: NAS100, Robusta Coffee, USDCHF Apr 25, 2024
- QCOM wants to create competition in the AI chip market. Hong Kong index hits five-month high Apr 25, 2024
- Japanese yen hits all-time low as BoJ meeting commences Apr 25, 2024