John Lewis, one of the other portfolio managers here, brought this Reuters article to my attention. The main topic is how bond shops are paying less attention to rating agencies and doing more credit research on their own. But right at the end of the article is a great quote about price action:
Some investors say credit default swap prices — the cost of insuring debt against default — are a much better measure of risk than credit ratings.
Data from Markit showed the 5-year CDS rate for Irish debt, for example, had shot up more than 220 points to more than 940 in the week ending July 8 — the week before Moody’s slashed the country’s credit rating to junk status, warning the debt-laden country would likely need a second bailout.
“Our approach seems to have quite a high correlation to 5-year CDS index which is a decent measure of value in bond markets and a much greater correlation than rating agencies have. In general markets tend to move ahead of rating agencies,” BlackRock’s Ewen Cameron Watt said.
I put the good parts in bold. Price is just the intersection of supply and demand, and when lots of self-interested parties are trying to figure out the clearing price, it tends to be a pretty good indicator of things to come. Relative strength is a pure reflection of price performance.
[...] What may be more telling is the price action—that’s the story behind the story. Judging from the price action in Italy and Spain, they may be the next to have problems. The same Wall Street Journal article included a nice graphic showing stock and bond market performance of the two countries. [...]