What is the Credit Market?

Video Transcript 

My name's Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only.

When we do business valuations and litigation support, one of the things you really have to understand is the credit markets. What is a credit market? Most people, when I say credit market, they start thinking of credit card. Credit markets is a market where bonds and those type of instruments are trading, and the thing about the credit market, it dwarfs the stock exchange. The daily volume in the credit markets can be trillions and trillions of dollars. And what's important about that is that, because so many people are trading bonds in the credit market, that it gives you a good indication of what's going on there. It can tell you about if there's any distress in the economy before the equity market.

When the Dow Jones goes down 100 points or 700 points, you know there's a problem. But the credit markets, if the 10-year bond goes down or up, or the 2-year goes up, or the spread between the 2 and the 10 changes, that tells you a lot. And what we do with these, the credit markets, it helps us to build up some figure capitalization rates. Because we can go into those credit markets and figure out what the interest rates are now. And another thing we do, is when we're doing an economic analysis of a business, in trying to forecast what's happening in the future, we'll look at the 2 and 10-year spread to determine what people are thinking.

And how we do this is because there's so many people buying and selling in the credit markets. They're buying bonds and selling bonds. If you see people selling 10-year bonds, well that's telling you that if they're selling them, they think that the interest rate on that bond is too high, which, you know, tells you that the economy is gonna get worse, or better, depending on what they're doing. And that's an important thing to know. It's called the wisdom of the crowds. If I know what people are thinking, and by looking at the credit markets and understanding the credit market it can help me with my forecast on what's gonna happen in the future in the economy, and that will affect the value of the business.

So, when someone says credit markets, think of what is a credit market? That's where companies and governments are trading their bonds, okay. They go to the credit markets, they issue bonds, and people buy and trade those. It's 30 to 40 trillion dollars in trading, which is a lot. So you get a lot of information out of that, and remember the stress in the credit markets will be evident long before any distress in the equity market will be evident. If you have any questions on this, feel free to give me an e-mail.