- U.S. credit risk is still substantially below 2012’s elevated risk levels.
- IG markets are currently fairly valued, as are HY markets.
- However, even as XO CDS has normalized in the last several months, it remains substantially above XO iCDS levels.
- This indicates that the XO market is overstating credit risk, and there may be investment opportunities in this space.
Analyzing credit default swaps (CDS) for corporate credits can be helpful to understand current market dynamics. It can help investors understand where there may be value inside the investible credit environment. It can also help investors understand when there is panic in the credit market that is not being reflected in the equity market, which may be an early warning sign for equity investors.
It can also identify when panic in the equity market is not reflected in the credit market, which may be a sign that an equity sell-off is not the start of a larger move, and therefore a buying opportunity.
After a period of panic earlier this year, credit risk is again moderating
Valens’ Custom Aggregate CDS Index shows the credit riskiness of companies as traded in the credit market, while Valens’ Custom Aggregate iCDS Index shows what the CDS should be. The iCDS is calculated using a multi-variable, market-relative, fundamentally-driven regression analysis, with the goal of identifying the intrinsic value of credit risk for a company based on its fundamentals and the current market context.
Intrinsic CDS levels show that XO credit risk is being overstated, and that long-term secular moves in CDS down have been justified by credit risk
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