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.
Commodity prices have taken a tumble during the past several days. A financial website says the decline is due to the "China crackdown" and "rising dollar." Yet, Elliott wave analysis foretold of the price drop when commodities were still rallying. Take a look at this chart.
See the Trader’s Classroom forecast and Elliott wave pattern that anticipated a rally which saw US Steel nearly double in price.
Ever heard of the acronym FOBI? It was coined here at Elliott Wave International and stands for the "fear of being in." Yes, just the opposite of the better-known acronym FOMO (fear of missing out). Here's an explanation.