What does this tell us about the future of corporate credit quality? It's not good. According to Bloomberg News, "The CDX index has soared more than 22 basis points in the first six days of trading this year on concern that the housing slump will drag the broader economy into a recession and deepen losses at financial companies, potentially pushing some into bankruptcy."
S&P expects the default rate for corporate junk bonds to rise from its recent 1% rate to as high as 3.4% by the end of October. But this is below the long-term average of 4.5%.
If S&P is right, 56 bonds will default this year -- a big jump from 2007's 14. And if the CDX is any indicator, Countrywide -- whose stock is down almost 10% today -- might be one of them.
Update: Countrywide is down 15% as of 2:40pm. According to theAssociated Press, that could be due to spiking of bad loans. 6.96% of the loans in its servicing portfolio were delinquent last month, up from 5.02% in December 2006. About 1.04% of the mortgage loans were pending foreclosure, up from 0.65%.
Peter Cohan is president of Peter S. Cohan & Associates. He alsoteaches management at Babson College and edits The Cohan Letter. He has no financial interest in Countrywide securities.
