My last post created a fair amount of e-mail response (for some reason not much in the comments), but one Anonymous poster did some work based on Moody's data from 1960, and came up with +140 as a "fair value" CDS level. Obviously that's wildly different from my +34 number. For those who didn't read my post, I wasn't claiming that +34 was the right level for corporate bonds, merely that an anticipated increase in defaults due to the current recession doesn't really suggest much widening in investment-grade.
Now I know AI's readers love to dive deep into the data, so here is Moody's default rates from 1960-2006.
The tiny blue lines are actual investment-grade defaults. That never gets above 0.51%. I've only included that because if I didn't, someone would ask. The relevant number for IG investors is the "All-Rated" number, which is in red. See, if you buy an investment-grade bond, odds are good that it would get downgraded to junk before it actually defaults. So looking at IG defaults only sort of hides the reality. The All-Rated number basically shows you defaults as a percentage of all bonds. Now that probably overstated IG defaults, but better to be conservative in a study like this.
Anyway, I've highlights three spikes: 1970, 1990, and 2001. This supports the idea that defaults tend to be centered around periods of poor economics. Not surprising.
My analysis was based on a 4.6% 10-year cumulative default rate. This is based on the default rate for bonds which were rated Baa at the beginning of any 10-year period within Moody's study period. Given that none of the actual spikes in my graphic are over 4.6% (and that the graphic includes all bonds), I think my spike analysis is valid. Its at least a fair illustration.
So anyway, I've asked the Anonymous poster to elaborate on his study, because it sounds like he's done some good work, and yet come to a conclusion that's radically different from mine.
If anyone would like an Excel copy of Moody's 2006 default study, e-mail me. accruedint *at* gmail.com.