Bond Market: “When Investors Should Worry”
The cost of insuring against default has been declining – what this may suggest
by Bob Stokes
Updated: November 12, 2020
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.
Our November Elliott Wave Financial Forecast 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.
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.
The "best stance" for bond investors to take right now is included in our just-published November Elliott Wave Financial Forecast.
Follow the link below to learn more.
The Stock Market Always Finds a Way to Fool Most Investors at Critical Junctures
It has happened again and again throughout market history!
Why? Because the patterns of investor psychology never change.
Know that Elliott waves directly reveal this psychology. So, knowledge of our current Elliott wave analysis can help you sidestep the market's surprises (yes, the market appears to be at one of those "critical junctures").
This one appears to be momentous.
Learn what our analysts are saying about the DJIA's price pattern.
Get started by following the link below.
What can you learn when you look at the stock market -- the Dow Jones Industrial Average, specifically -- going all the way back to 1788? A lot! For one, clear Fibonacci proportions begin to emerge between multi-decade historical periods. What's more, the same Fibonacci proportions also begin to point to the year 2021 as a very important moment in financial history.
In June 2020, it seemed the natural gas bear would stay for a while. Yet early July saw a turn from its long-term low. A four-month rally followed and prices more than doubled: See the forecast that got it right.
"When empires fall, it is usually accompanied with a debauched currency," says our Head of Global Research Murray Gunn in this sobering overview as to why 2021 may usher in "a changing world order."