Thursday, September 18, 2008

Corporate Bond Freefall

Here's a chart pattern you don't see very often. Let's call it "the cliff":

This is the iShares Investment Grade Corporate Bond ETF (LQD), which has fallen 15% in less than a week. Now, this only reflects a change in bond prices, and doesn't mean that corporations have reduced their interest payments to bond holders. However, it does mean that investors are worried that some interest payments are threatened.

This brings us one step closer to the derivative meltdown scenario. If and when corporations start to default on bond payments, then credit default swap obligations kick in, and cash-strapped bond insurers (like AIG) will be asked to pay up. What happens if insurers default? Nothing good, that's for sure.

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