Sovereign tail risk is haunting corporate spreads, says Goldman

In its latest Credit Line research, published today, Goldman Sachs says that sovereign tail risk continues to haunt corporate spreads and it would be premature to get long global risk appetite. The bank advises long-horizon investors to take advantage of current opportunities in the cash market. For shorter horizon CDS exposures, by contrast, investors should be patient, looking to get long risk when it looks like the market is closer to actions like stress tests, capital injections, and/or other measures capable of substituting for the loss of confidence in the sovereign backstop.

While continuing to believe that the European crisis will be solved, Goldman says that what’s missing, and what the market appears to be discounting, is the institutional framework needed to implement the necessary policy response. The European SPV and IMF funds represent a good start, but the market is looking for additional reassurance. Strategists doubt the market will afford policymakers the luxury of muddling through at a leisurely pace. This suggests that the sovereign crisis may yet need to get worse before it can get better.