The Credit markets continue to get worse and liquidity in the corporate cash bond market is simply dreadful. The chart above is the basis spread between the individual cash bond members of the IG CDX Generic 5 Year CDS Index and the Index itself. What the basis is saying is that the derivative instrument (1st chart below) is trading more expensive to the cash basket in the index because it is more liquid than the bonds themselves. This spread is now at all time wides of negative 17 basis points. The basis at the October wides was 5.5 basis points and the IG CDX at the October wide was about 95 bp. Added together the cash wides were 100 bp in October. If you apply the same math to today and add 86 IG CDX and 17 bp we get 103 bp for the cash members. So basically we are wider today than at the October stock lows but yet the S&P is 10% higher. So while on the surface it appears that IG CDX CDS has not reached the October wides it is not good underneath the hood. Additionally the VVIX (volatility of the volatility) broke out today and closed at 10 week highs (second chart below). When I see the VVIX explode like this it suggests to me that someone somewhere is struggling behind the curtain and that counter party risk is becoming elevated.
My message is quite simple. Credit needs to improve pronto or the same conditions that existed in August for a rapid repricing of equities exits. However, we also have the FOMC meeting next week and I also think we need one more lower high before a big correction can take place. Either way my bias has been and continues to be that this is a bear market rally that is about to fail. At the very least avoid all over levered companies until the dust clears.Twitter