Credit Market Sneezes... Pundits Declare Pneumonia

Credit default swaps on banks and sovereigns are wider, credit markets are less favorable than they were a year ago, there are still rumors swirling about the borrowing ability of European banks, etc. But now that I’m getting emails from smart friends who work in non-finance areas, worried that everything will soon seize up 2008-style, I thought it would be worthwhile to get some perspective on a few risk metrics.

TED Spread

3mo. LIBOR-OIS

Bank of America implied volatility

None of these graphs suggests that it’s time for deep concern. BAC is trash: everyone knew that already, and even with all the worry, short-term implied vol is only halfway to the 2008 peak. TEDSP and LIBOR-OIS have perked up a tiny bit. But with all the central bank intervention of the last few years (not to mention Saudi sovereign wealth and other new sources de liquidité), it’s hard for me to understand how an American or European bank could fail to find the cash it needs. I’ve intentionally left out charts of CDS spreads because I’m not convinced that they tell us anything in this context beyond the fact that some people prefer to hedge in OTC products rather than listed ones – so, no new information beyond what options markets are saying.

I’m as pessimistic as anybody about the solvency of major U.S. and European banks, about whether politicians and their constituents on both continents have the political will to do the right thing (in the U.S.: to take advantage of the bounty laid before us, instead of autistically obsessing about the meaning of zero), and so on. Yes, economic conditions are terrible. We could be on the cusp of another meltdown. Etc. But that’s always true – that’s the sine qua non of advanced capitalism, you give up stability and gentle growth in exchange for explosions and glitter and plastic toys. And a modest tightening in credit conditions – not even breaching the levels of the May 2010 flash crash – may be great for Zero Hedge pageviews, but it’s simply not worth the distraction.

Go outside, have a beer. There’s always something to worry about. You can hedge yourself or not, and then think about something else.

Libor-OIS vs Euribor-OIS The 3-month Euribor-OIS spread is a lot worse than the 3-month Libor-OIS spread. The former uses a broader cross section of banks than the latter. Submitted by Catalite (not verified) on Thu, 2011/08/25 - 3:10pm » reply |