Take a look at the chart below. I talked about the widening in spreads yesterday, but I thought a chart would help.
My Take:
Ok guys, this is the spread for "AAA' paper. To simplify things, the higher the spread, the more it costs to borrow money. Right now based on the borrowing spreads, you need a return on investment of about 10% just to break even if you spread your risk out properly as an IB or hedge fund.
This means throwing "BBB" paper in with your "AAA" paper in order to get the best ROI as an investment bank. This is the toxic crap that the bond market is avoiding which is why you are seeing spreads open up.
Bottom Line:
As I explained yesterday, the cost of borrowing money is surging for everyone including banks! The bond market is going into treasuries which is forcing the borrowing of money to be more expensive as the spreads rise in order to attract money.
Keep in mind, a lot of this "AAA" toilet paper was levered by the IB's by ridiculous multiples. This will make the losses on this paper that much worse .
This data is horrific! I have no idea how the market trades this information short term, but I know what the long term implications are.
When borrowing "AAA" paper risk rises, its time to take notice. the market has still not priced this in IMO. Once they "wake up", equities are in trouble.
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