The Markit MCDX index is trading wider than the Markit CDX.NA.IG index for the first time since Markit MCDX was launched on 6 May 2008. This means that buying protection on U.S. municipal debt now costs more than buying protection on US investment grade bonds.
Spreads on the Markit MCDX index, which references 50 municipal bond credit default swaps (CDS), are currently at around 330 basis points. Spreads on the Markit CDX.NA.IG, which references 125 investment grade bond CDS, are at around 269 bps.
Gavan Nolan, credit analyst at Markit, said: "The current widening of Markit MCDX spreads reflects the perceived increase in municipal credit risk. A confluence of events – an economy in recession, decreasing home values and increasing unemployment – has combined to reduce municipalities’ sources of income. Several municipalities have announced recently that they are experiencing financial difficulties. The likes of Michigan and New York City, exposed to the struggling auto and financial sectors respectively, demonstrate the importance of credit risk in the municipal market.”
Markit is the owner of the Markit MCDX index.
