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Why are credit markets forecasting absolute disaster?

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While the stock market is rallying, the credit markets are still working on the assumption of absolute disaster. Where is such a dire forecast coming from?

Deutsche Banks published a study that shows the gloomy reality that the credit markets are predicting. They used the iBoxx index of investment grade corporate bonds and found that default rates in Europe are priced at 38%, in the US at 40% and at 51% in the UK. All of these readings are worse than in the Depression.

Nothing has changed over the past two weeks even in the face of a strong stock rally. The study concludes that there can only be two explanations for the divergence. One theory is that the credit markets are so illiquid that the numbers bear no relationship to the outcomes that investors expect, or that investors expect a rerun of the Great Depression.

So in the overall, the message is -- choose your poison -- recovery or depression.

Which do you think will happen?

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Symbol Lookup
IndexesChangePrice
DJIA-154.4810,309.92
NASDAQ-37.612,138.44
S&P 500-19.141,091.49

Last updated: November 27, 2009: 11:12 PM

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