Spread Between US and European Investment Grade Spreads Hits All Time Record
All those who may have had the displeasure of trading CDS in late 2008, just after Lehman collapsed, will recall that the most perplexing phenomenon was the massive surge of US IG spreads, coupled with the very modest move out of Europe. How the market back then was so retarded not to realize that the US banking system is just a fraction of the European one, and thus the carnage that would follow in Europe should all hell break loose in the US would be orders of magnitude worse, is merely an indication of just how stupid most market participants are. Yet looking at the chart below shows that after years of denial, finally credit traders are realizing the sad truth: namely that the European financial system is far more risky than the American one. After having traded tighter pretty much since inception, the US IG index went tighter to iTRAXX Europe for the first time in May, when it became obvious that the best Europe can hope for is a delay of the inevitable. Yet even back then the widest the now positive spread differential hit was 14 bps. Enter November 26, and a new all time wide of about 16+ bps. In other words, the incipient risk of the "safest" of European names is now the widest it has been to comparable US risk. We expect iTRAXX to continue surging ever wider as the European implosion, after well over two years of denial, is finally accepted by all. Of course, just like in the inverse case, should Europe collapse, the US will follow shortly, as the great globalization experiment ends, and America's ability to fund an endless current account deficit, the Sino-US decoupling, and the myth that Keynesianism is in any way viable ends with a massive thud.