A dramatic 2008 will soon be history, and this week proved to be no exception to a frantic year as we saw some extraordinary events. We had the largest fraud scandal ever in financial markets. Then we had the Federal Reserve lower its key interest rate to 0-0.25%. Finally, on Wednesday Deutsche Bank dropped a ‘debt market bomb’ by announcing that it would not call a LT2 bond.
Eventually we are here: The last weekly credit update of an inconceivable 2008! And what better way to mark this than by the revelation of the largest fraud scandal in the history of financial markets; namely the fall of Bernard Madoff (please see more details below).
The FOMC meeting marked another noteworthy event this week as the Fed lowered its interest rate to between 0-0.25%. Thereby the Fed has used the last of its interest rate bullets and going forward it will be interesting to see what actions it undertakes if the crisis rumbles on. After the Fed announcement CDS indices moved tighter. Currently, the investment grade index, iTraxx Europe, trades at 188bp down from 212bp last Friday. The high yield index, iTraxx Crossover, trades at 1050bp down from 1090bp last week.
Subordinated CDS has underperformed considerably during the week on the back of the news from Deutsche Bank (more on this below). This is because investors now need to cover subordinated exposure until maturity rather than until call.
