This entry was posted on Monday, April 28th, 2008 at 9:47 am and is filed under Credit.
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The IG (investment grade) series represents an equally weighted index of credit default swaps (CDS) on 125 investment grade companies that have outstanding debt subject to credit spread fluctuations. As such, the spreads for individual CDS or for the index (CDX) as a whole, are measured against the LIBOR swap curve. The series (1 thru 10) is reconstituted every six months to account for fallen angels that have lost their investment grade rating by at least 2 of the 3 main ratings agencies. The current on the run CDX-IG.10 was newly launched on March 25 with about a half dozen new components replacing the those companies that had been jettisoned, (see http://www.markit.com for more info).
Given how far and how fast CDX spreads have tightened since peaking around March 13-17 when Bear Stearns was going super nova, the prospects of a recession are beginning to look less less likely. My understanding is that models tend to target the 140bp threshold area for the CDX-IG.10 that equates with recession. That level is much wider than the current level at 86/87, which closed down -1bp as of the close on Friday.
Note that the preceeding off-the-run CDX-IG9 closed at a slightly wider spread of 92/93 on Friday reflecting the half a dozen or so non-investment grade consituents in its composition. Note also that the current level for the IG9, which has 6 months more price history than IG10, has tightened by 100bp from its peak wide closing level of 192.5bp on March 13 just as Bear Stearns was going super nova, and is well below the 61.8% Fibonacci retracement threshold of 101bp, which from a technical point of view suggests scope for it to tighten to the previous low tight level of 44.5bp hit on Oct 11, 2007, or about 95.5bp shy of the level thought to indicate a recessionary environment.