From the Wall Street Journal:

From February 2003 to February 2007, the KWB Bank Index had a 90% correlation with price changes in credit-default swaps, according to J.P. Morgan data.

Since March 7 that linkage has evaporated, falling to nearly zero, the J.P. Morgan data show. In other words, they now rarely move together.

If this correlation is to hold up over time, either bank stocks have to rally hard or the cost to hedge their debt has to reverse course. And in my experience, the bond guys are usually right.

Source:

As Markets Continue to Sink, Investors Take Opposite Views On Banks’ Stocks, Debt

Tom Lauricella

The Wall Street Journal

June 30, 2008

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