Monday, November 10, 2008

Credit Risk Analysis

Below are the historical yields of the following fixed income indices; Treasury, U.S. Investment Grade / High Yield, and Emerging Market.

Of note is the recent spike in the cost of borrowing for Emerging Market countries. Emerging Markets were supposed to provide the cushion to our global economy, but as the NY Times pointed out on October 7th:

Many of the world’s fastest-growing economies thought they had insulated themselves from problems in the developed world. But economists said that simultaneous turmoil in Europe and the United States was too much to bear. “The potential of a global recession is awakening emerging markets that they will be hit stronger than we thought before,” Alfredo CoutiƱo, a senior economist at Moody’s, the credit rating agency, told The Times.
Source: Barclays


  1. Bailouts' Unintended Consequences

    Within the next 12 months the yields on treasuries will begin to rise. This is because the fools (China etc.) who have been willing to accept low interest rates will be tapped (China has a stimulus package of their own to fund etc.) out.

    This will cause all interest rates to rise, which will make the housing market worse. If it gets too much worse then the stability of the financial system will once again be the main concern.

    Shorting treasuries seems like a rational investment, but yields may decrease before they increase.

  2. agreed, BUT a 70 year long credit bubble is deflating. if this process isn't stopped, rates could go lower and stay lower for a long period of extended time.

    i think this process will in fact be stopped as mr. bernanke and company won't stop until this threat is neutralized. at that point, inflation and high interest rates will likely be the result.