For five weeks running the ABX BBB- index of credit default swaps has been plunging, finishing Friday at just under 69. That means it now costs 1-1/4 million dollars a year to protect 10 million worth of the bonds against default.Tom Petty's "Free Fallin'" comes to mind when I see that chart. Perhaps Peter Schiff, president of Euro Pacific Capital is correct in thinking that the BBB- ABX contracts will go to zero. In more ominous fashion, A rated tranches are also weakening. Here's something to ponder:
Sorry, but these charts of what swap players are willing to pay don't lie. It should be noted that this index tied to the A rated tranches is still above 90 (ABX scaling makes it look worse), but there has clearly been deterioration which is an indication that spillover from subprime is starting to occur into the what are supposed to be higher quality, or "safe" areas of the mortgage world. Only $1 trillion in adjustables will reset this year. But, don't worry be happy - right?