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Bloomberg News reports that a measure of the risk that corporations won't make their bond payments is at record high levels. In 2006, it became clear that subprime mortgages might be in trouble and that their problems would hurt investors in mortgage backed securities (MBSs). Now there could be trouble in the $3.7 trillion corporate bond market.
How so? The CDX, or Markit CDX North America Investment Grade Series 9 Index, a benchmark gauge of default risk tied to the bonds of 125 companies including Countrywide Financial Corporation (NYSE: CFC), climbed 3.75 basis points to 100 basis points as of 8:15 a.m. this morning in New York. The index is at the widest since the CDX indexes started trading in 2004.
Despite denying bankruptcy rumors, bond buyers are not convinced that Countrywide will be able to stave off bankruptcy. Credit-default swaps on Countrywide moved deeper into distressed levels. Sellers of credit-default swaps were demanding 30% upfront and 5% a year for contracts protecting Countrywide bondholders from default for five years. That's up from 28% upfront and 5% a year at the close of trading yesterday.
What does this tell us about the future of corporate credit quality? It's not good. According to Bloomberg News, "The CDX index has soared more than 22 basis points in the first six days of trading this year on concern that the housing slump will drag the broader economy into a recession and deepen losses at financial companies, potentially pushing some into bankruptcy."
S&P expects the default rate for corporate junk bonds to rise from its recent 1% rate to as high as 3.4% by the end of October. But this is below the long-term average of 4.5%.
If S&P is right, 56 bonds will default this year -- a big jump from 2007's 14. And if the CDX is any indicator, Countrywide -- whose stock is down almost 10% today -- might be one of them.
Update: Countrywide is down 15% as of 2:40pm. According to the Associated Press, that could be due to spiking of bad loans. 6.96% of the loans in its servicing portfolio were delinquent last month, up from 5.02% in December 2006. About 1.04% of the mortgage loans were pending foreclosure, up from 0.65%.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Countrywide securities.
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Reader Comments (Page 1 of 1)
1-09-2008 @ 1:25PM
David Huston said...
Wonderful. It was also reported last evening that the bonds for the Monorail in Las Vegas - a project that has basically failed from its inception - are insured by MBIA. On information and belief, the fund may be exhausted that was established to make payments on the bonds since the start of the project, as early as this year. If that happens, some solution, including possible resort to the insurer may be necessary - adding more burden to the already overburdened insurance company.