Investors see dark days ahead for corporate America. With consumer spending falling fast and unemployment rising, corporate default rates have already more than doubled in 2008 from the historically record lows enjoyed over the last few years. With plenty of bad news on the horizon, Wall Street isn't waiting to insulate itself as issuance of credit default swaps to hedge against the debt of some of the largest companies in America is taking off.
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MarketWatch is reporting that spreads on the CDX North America
Investment-Grade index, which tracks credit default swaps on the debt
of 125 companies in the U.S. and Canada, climbed to a record 275 basis
points earlier on Thursday, according to data from broker Phoenix Partners Group.
The index, which includes heavyweights like General Motors Corp.,
AT&T Inc., Boeing Co., Citigroup Inc., Dow Chemical Co.,
Wal-Mart Stores Inc., Ford Motor Co. and Chrysler LLC, is getting rocked by
the tribulations of the financial and automotive sectors.
Spreads on swaps to protect against a default on Citi's debt are
gapping wildly larger, hitting an astounding 400 basis points Thursday, up
from roughly 360 basis points Wednesday, according to Phoenix Partners
Group. Issuers of the swaps are now charging double what they wanted
last week for contracts to pay out in case Citi can't make a debt
payment.
The cost of a company's credit default swaps are a leading indicator of
how healthy markets feel the company is. The widening of the swap
spreads across so many components of the economy signals a sentiment
that the credit crisis may be worsening in spite of the efforts of
governments worldwide. -
George White
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