Reply #62: Ruh-Roh! Crossover index yields invert only for 2nd time

[UpInArms]

http://www.reuters.com/article/bondsNews/idUSL2071659520080220?sp=true

LONDON, Feb 20 (Reuters) - The yield curve of the Markit iTraxx Crossover indexes inverted for the second time in its history on Wednesday, with the five-year index reaching up to 5 basis points wider than the 10-year index.

Analysts at Barclays Capital advised investors to bet that the inversion of the curve is likely to become even steeper as the credit crisis deepens and corporate defaults pick up.

The five-year Markit iTraxx Crossover <ITCRS5EA=GFI>, a key indicator of European credit spreads made up of 50 mostly "junk"-rated credits, reached an all-time high of 614 basis points on Wednesday, according to data from Markit.

The 10-year index, which has lower trading volume, was quoted at about 609 basis points at the time, traders said.

By making an historical comparison with 2002 when defaults peaked in the last credit downturn, the analysts found that the inversion could reach 100 to 150 basis points .

"There is still a lot of room for further inversion if market turmoil continues," said Graham Rennison, a Barclays quantitative credit strategist.

The Crossover curve inverted for the first time in January but mostly for technical reasons, he said, while Wednesday's inversion was the result of "a much more measured kind of flattening", in line with the general widening of the index.

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