Friday, March 02, 2007

CDS report: a week of heavy volume amid wild swings

European junk-rated credit derivatives were set to break all records in volumes this week amid the sharpest swings seen in the market place since the last sell-off in May.

Deutsche Bank estimates volumes will hit 200bn euros this week, surpassing May’s record. Trade was steadier on Friday, but traders were braced for the possibility of sharp swings later in the day when the US opens for business. Friday is usually a quiet day, but low flows mean that swings could be exaggerated.

This week has seen extreme volatility in the Crossover, which tracks the 45 most-liquid junk-rated credit default swaps in Europe, with moves of at least 15 per cent in each of the past three days as investors have become more risk averse in an uncertain market.

The Crossover was trading at a mid-price of 217 basis points, which translates into a cost of €217,000 to protect an investor against default on €10m of debt in this basket of credit default swaps. This is 1bp wider on the day. Credit default swaps, which offer a kind of insurance against the non-payment of unsecured debt, are derived from the underlying bonds in the cash credit market.

The index, which has been the most heavily traded of the three main iTraxx indices, has swung wildly from around 200bp at the start of the week to a high of around 238bp on Tuesday afternoon.

The main Europe iTraxx index, which tracks the 125 most-liquid investment grade names, has also been heavily traded, but has remained stable despite the shock waves from equity swings across the world.

It was trading at around 23.5bp this morning, 0.25bp wider on the day, and only a fraction lower than its level at the start of the week. The other main iTraxx index, the HiVol, which covers 30 companies from the main index with the highest spread or price, was also steady at around 45.25bp, 0.75bp tighter on the day.

As always in volatile times, the index dominates credit derivative flows. This week so far it has captured around 80 per cent of credit default swaps flows, with the Crossover seeing 50 per cent of that number.

Of the individual names, moves were limited as the focus remained on the headline indices.

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.