I’ve kept an eye on this spread all along but never post the chart because it’s just too depressing. If you want to cheer up (assuming you have a twisted sense of humor), you can now read this article from February 2007 with the benefit of hindsight: CDO surge squeezes bond funds at Deutsche Bank and Vanguard:

“Contracts that protect investors against defaults are being sold in record numbers and then bundled into securities known as collateralized debt obligations … Banks doubled the amount of CDOs outstanding in the past two years to $2.6 trillion, including a record $769 billion sold last year, according to J.P. Morgan Chase … The diminishing returns on bonds prompted the German bank WestLB to plan on switching some of its $6.5 billion of bond investments into credit derivatives.”

Ah yes, old WestLB, later bailed out by the German taxpayer.

“The EU gave its assent to a €5 billion, or $7.8 billion, German government rescue package for the bank … The Duesseldorf-based bank lost €1.6 billion last year, making it one of several European banks that was exposed to risky investments.”

So much for those savvy German bankers.

Click to enlarge (CMBS BBB- Spread over the 10-year Treasury)

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