3 replies to this topic

[arbman]

Strangely volatile activity lately, but it didn't rise much during this decline...

There must be still plenty of liquidity...

- kisa

[jjc]

kisa, I find your charts very interesting... Could you help me with the reading of this one; units? method of construction? How do I interpret?

[arbman]

Here is the updated short and long term 9mo growth rate of the commercial credit (smoothed with 7wma). The correlation starts mostly after 1998...

There is probably more liquidity coming into the markets in the weeks ahead, so I do not look for a big decline to start here, but probably after the 20 wk cycle low looses its strength in May or so...

- kisa


PS. so, this is still my projection pretty much...

Edited by kisacik, 07 March 2007 - 12:23 PM.

[arbman]

kisa,
I find your charts very interesting... Could you help me with the reading of this one; units? method of construction? How do I interpret?

OK, let me try to explain, the credit spreads is the difference in between a benchmark lower risk bond yields and the bonds yields issued by a specific market segment (in a sector or market cap).

The lowest risk bonds are the treasuries backed by the gov't of US. So, they have always AAA rating, according to Moody's or S&P for example. The corporate bonds is the highest quality bonds as well, but they are from the private organizations, these are usually AAA grade bonds, they have a ver low chance to default unless something substantial happens. So, we are looking at the spread in between the highest grade corporate bonds and the treasuries.

There is a yield curve for the corporate bonds just like the yield curve for the treasuries, however, you need to fit a curve since the corporate yields for the same maturity date will still vary slightly depending on the sector a bit. Every analyst has their own methods, what you are looking at here from S&P is a single number, and in fact I don't know whether you are looking at the spread at the closer to long end or closer to short end of the yield curves, I would assume something around 5 yrs or some sort of geometric mean. The results would be much more descriptive if you actually look at the difference of the entire spread over time, this would build a 3D spread surface...

About how to interpret these results, if the liquidity is in trouble or the risk is increased, you would generally see an increase in the spreads, people will ask more to get into the risk. This usually spikes even faster for the lower grade bonds such as the speculative grades, these usually have B or less quality or high risk (high return) bonds. In the above spread charts, the volatility is increasing, clearly somethings are not right or the liquidity growth is contracting and the spread is about to expand and it did, but the spikes are not so concerning. If you look there is already a higher low in the short term time frames and, in fact the market priced the risk at the several years low a couple weeks ago, clearly mispriced (I mentioned this earlier), this means the momentum is turning to the upside or risk is increasing.

So, I believe this correction is not over yet and I would expect the upper trendlines or resistance areas to be visited at a minimum for the intermediate term...

- kisa

Edited by kisacik, 07 March 2007 - 06:24 PM.