Debt crossing

An interesting little headline ran across my Bloomberg terminal today about the stress in the credit markets. The iTraxx Crossover Index has soared to a record of 10%, compared to c. 3.4% at the end of last year. For those of you who aren't derivatives fans, this index represents the cost of buying insurance against credit default for a basket of sub-investment grade debt.
The trend isn't a surprise given the economic mess we're in. However I was curious enough to dig into the index composition, and I started to appreciate just how awful some of the debt sitting on banks' balance sheets must be. For example:

• HeidelbergCement - Overleveraged german conglomerate wrecked by nutty family patriarch: 3654 bps
• DSG International - A UK version of Circuit City with worse customer service: 1700 bps
• Alcatel-Lucent - Telecoms manufacturer disconnected from reality: 1240bps
• Nielsen BV - Levering up a ropey market research firm (brilliant idea Blackstone!): 1042 bps
• Virgin Media: Another vanity project from Richard Branson: 940bps

Having said that, the yields on some higher quality names are really starting to look attractive. Rather than rushing in, I'd suggest being quite careful and do some thorough credit analysis, as I've bumped into several "smart" private clients and institutions who jumped on the trade way too fast, and got hit by recent corrections. And I'd avoid the passive vehicles, as the indices they use are so overweight financials.