Look Out Below!

The brief recovery in the credit markets caused by the government bailout is officially history.

The Journal continues its good coverage of the commercial mortgage-backed securities market, which has cratered in the last few days and is now pricing in Armageddon.

The default rate on commercial mortgages remains near its historical low, although it is increasing. Overall, the number of commercial mortgages packaged into securities that are 30 days or more past due rose to 0.64% in October from 0.39% at the end of last year. That is the highest delinquency rate in two years but still far from the kind of carnage that occurred during the commercial real-estate collapse of the early 1990s. Back then the cumulative default rate on loans made in 1986 reached 36%.

The trading levels of CMBS bonds imply a cumulative loss rate of as much as 40% on top-rated bonds, which means that at least 70% of the underlying loan pool would have to go into default, said Richard Parkus, head of CMBS research at Deutsche Bank Securities Inc. But he, like other market observers, views that as an unlikely scenario.

Some investors believe low trading volume is a factor. “There’s very, very little volume that is trading and some forced sellers in small volume are just causing spreads to widen out,” said Robert Kapito, president of BlackRock Inc., a money-management firm.

The NYT, in a nice overview story, puts Armageddon in context:

“Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe Balestrino, fixed income strategist at Federated Investors, who added that he thought prices had fallen too far in many cases.

The LA Times (justifiably) hauls out the Crash adjectives:

An intensifying panic has gripped the stock market, sending share prices to new depths and leaving investors afraid that they’ll never be able to recoup their losses.

The latest teeth-gnashing plunge Thursday virtually wiped out the remaining gains from the five-year bull market that began in 2002.

Let’s play Find the Crash Words in the LAT story: thrashed, battered, misery, plummeted, dive, plunged, dark, grim, “sharpest decline since the Great Depression”, brutal, sell-at-any-cost, “feverish collapse”, staggering, wiped out, torrent, slashed, severe.

You think they’re trying to tell us something?

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.