Given the overwhelming importance of CDS's to the current credit and equity markets, I think it useful to examine the relevant indexes (CDX) a bit more in depth.
The CDX.NA.IG index tracks CDS's for 125 investment grade bonds issued by North American corporations and it is followed closely by traders for indications of credit risk perceptions. But just how solid are the ratings of the underlying bonds? It turns out that on average this is essentially an index of BBB+ bonds, as the pie chart below shows. In years past such a rating would hardly be considered "real" investment grade, being just a couple of notches above junk. (I know of several pension funds that refused to buy bonds rated below AA; this is almost impossible right now, if any sort of name diversification is to be achieved.)
So, not only are investment-grade credit spreads abnormally low by historical standards (though rising during the past two weeks), they currently apply to bonds that barely qualify as investment-grade in the first place. This clearly poses a double potential risk for CDS prices, should business conditions weaken.
If this was storm insurance, it would be akin to setting premiums to rock bottom prices, even for houses located in the second row from the beach. Why? Because there hasn't been a storm in several years and underwriters are greedy. Or, think about it in cinematic terms, as the title implies...