As the cost of buying default protection rises, typically, a reversal of fortunes can be seen in the equity market. Recent dislocations can be seen in the home builder sector as there has been an increase in the cost of buying default protection without a corresponding decline in equity prices across the sector.
On 2/7/11, Homebuilders CDS spreads were at 214 bps, near the tights for the year. On that date, the S&P Homebuilders Select Industry Index (equity) was at 2009. Last night, homebuilders CDS spreads closed at 284 bps, rising 33% since early February. The equity index has traded relatively flat over this period, closing at 2029 last night, a 1% increase.
Could this be a signal that the equity market for this sector is in for a down turn?