Whatever Did The CDS Market Mean By That?
The credit default swap market is a modern Delphic Oracle. It speaks loudly and profoundly - these days at reuglar intervals - albeit using somewhat arcane terminology. And after major statements such as yesterday (or perhaps this week in general), it’s worth pausing to reflect on, and argue about, what it really means.
Thursday’s statement, to me, was about US banks (graph).
The risk of default for US banks, according to this market, is rising back towards levels not seen since mid-October. That is striking enough - but remember what has changed since then: (1) the G7 promised not to let any more systemic banks fail, (2) Treasury has provided repeated recapitalization funds on generous terms, and (3) the Fed offers massive, nontransparent funding to anyone in distress. How can it be that the credit market still or again feels the risk of default rising so sharply and to such high levels?....MORE
HT: Marginal Revolution, who links to the followup and whose commenters are sharper than average.
