Suckers' rally

31 May 2005

Credit spreads have tightened fast as investors have covered short positions in the wake of GM s and Ford s downgrades. But a slower economy, higher interest rates and more defaults all point to wider credit spreads, not tighter ones.

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The credit spread on the Iboxx index of nonfinancialsector corporate bonds was 64 basis points at Monday's close. Meanwhile, the credit spread implied by the Itraxx index of liquid credit default swaps was 42 basis points.

These credit spreads were as wide as 75 basis points and 60 basis points, respectively, at the close on May 17, in the market turmoil caused by the downgrading of General Motors and Ford to junk credit status.

At their tightest point this year, on March 3, the spreads closed at 39 basis points and 28 basis points respectively.

Both indices refer to investmentgrade, eurodenominated bonds.

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