The cost of protecting bonds against default has improved greatly, and is essentially back to pre-Lehman collapse levels. Of the 125 companies represented in the index below, CIT is the most expensive, it will cost you $400k per year to insure $1mm in CIT bonds against default for five years. Other names that remain elevated include AIG ($160k/year/$1mm notional), GE Capital ($38k/year) and MetLife ($51k/year). Just for a comparison, the cheapest bonds to insure are those issued by AT&T ($2k/year/$1mm notional).
This weekend, CIT used a lifeline and phoned their friends, or a mobile shout out for those of you who prefer Cash Cab over Millionaire, but the CDS market didn’t even flinch at the possibility of CIT’s default. A good sign? Depends on how you look at it. From one perspective, perhaps CIT’s bankruptcy would be inconsequential to the market as a whole and the system could keep on its current path. Or maybe our memories are just too short for us to be worried about what could still become the fifth-largest bankruptcy in US history.
Cliff J. Reynolds Jr.
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