Chart of the Day – Investment Grade CDS

by Enis August 7, 2012 11:30 am • Commentary

With the S&P 500 breaking the psychological 1400 level today, I wanted to see how the credit markets were behaving.  The SPX index has only traded above 1400 for a 3 week period this year (late March / early April, and a couple days in May), so we are certainly in an environment where the indices are probing the highs of the year.

The 5 year Investment Grade CDS index is composed of 125 equally weighted credit default swaps on investment grade entities.  It’s basically an index to measure the CDS of the large, high-quality credits in the U.S.  Since these are high quality stocks that make up the index, they generally have a low risk of default.  But the index is a good measure of how jittery the credit markets are relative to stock markets.  A low IG CDS level usually corresponds to high stock prices and vice versa.

Here is the chart of the 5 year IG CDS index (Series 17, the series that started trading almost 1 year ago):

 

 

I’ve drawn a red line to indicate the periods when the SPX was trading above 1400.  As you can see, today’s breach of 1400 has not corresponded to a break of the 90 level in the IG CDS index.  Stocks have continued to rally in the face of headwinds in other markets all year (dollar and Treasury bond strength for example), so there is no guarantee that the credit markets divergence means a stock turnaround.  But it’s another market not confirming higher stock prices.