Dow 10000 might grab the headlines. But Crossover 500 might be a more telling indicator.
The widely watched Markit iTraxx Crossover index, which tracks the credit risk of 50 mostly junk-rated European companies, became the barometer of fear in the European credit markets as the crisis deepened. It peaked at more than 1,150 basis points (11.50 percentage points) in March.
But Thursday, the index traded under 500 basis points for the first time since June 2008, underlining the return of confidence. At 1,000 basis points, the index was suggesting a one-year default rate of 16%; at 500 basis points, that has fallen to around 9%. Even that may be overstating the risk.
The number of companies defaulting slowed to 50 in the third quarter, down from 89 in the first quarter and 83 in the second, Moody's says. That took the global default rate in September to 12%, but the ratings firm forecasts it will fall to 4.5% in one year's time even if there is only a modest global economic recovery and a continuing rise in U.S. unemployment.
Key to this improvement has been the blossoming ability of the bond market to provide refinancing, with lower-rated companies able to raise cash and rebalance their maturity profiles. Global high-yield issuance year to date stands at $144 billion, according to Dealogic, almost double 2008's full-year total of $78.7 billion.
As long as this continues, expectations of defaults should continue to decline -- giving more companies access to finance. A new shock could easily cause disruption, but for the moment a virtuous circle seems to be at work. The Crossover, and the Dow Jones Industrial Average, could rally further from here.
