Yesterday MS published there Credit reports and they are more worried about the Macro environment.

The macro backdrop has worsened considerably since the end of June. Rising sovereign bond yields in Spain, weaker domestic and global economic data as well as the rising possibility that Greece once again fails to meet their bailout program criteria have all been shrugged off by credit investors. Since the end of June, the yield on the 10-year US .Treasury has fallen by 22bp and recently touched an all-time intra-day low of 1.379%. On the surface, that should tell you that risk assets have sold off. Yet, within the credit space. Investment Grade spreads have tightened 12bp, Emerging Markets US$ credit spreads are 9bp tighter, and High Yield credit spreads are unchanged.

An unusually low interest rate environment forcing investors to reach for yield, combined with very strong technicals, is the most obvious explanation for the resilience of the credit markets. Fund inflows and low net issuance, coupled with maturities and coupon income, has left many funds with excess
cash to put to work. Add in the fact that many investment funds are adding credit risk to achieve yield bogeys they cannot otherwise get in traditional safe-haven assets and you are left with a market that looks unusually strong given the macro risks on the horizon. In effect, monetary policy is working to some degree in that it is forcing investors to take on more risk.Given the positive technicals and low
interest rates, can credit continue to shrug off the bad macro news?

They believe the answer is no. As we have stated in previous issues of The Credit Report we believe risk asset rallies can be self-defeating in that they essentially let policymakers off the hook. Recent history suggests that policymakers will act only when market pressure forces them to act. Thus, a credible
solution to the European debt crisis and potentially the fiscal cliff here in the US might only be found in the aftermath of a market sell-off, in our view. We would not chase the current rally and believe wider credit spreads are likely in the months ahead.

The recent rapid rise in Spanish sovereign bond yields and the inability of European policymakers to sever the sovereign/bank link (at least in the near term) may force Spain into a broad sovereign bailout program.

The Greek fiscal reform program is currently being reviewed by representatives from the Troika. A lack of progress may result in bailout funds being withheld, which could force Greece out of the Euro Area.

Citi Chief Economist Willem Buiter now assigns a 90% probability to a Greek exit within the next 12-18 months, with the most likely date being in the next 2-3 quarters.

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