CDS report: Sovereigns wider than corporates? | FT Alphaville

CDS report: Sovereigns wider than corporates?

Gavan Nolan of Markit wrote this CDS report

After a brief pause on Friday normal service was resumed as the credit and equity markets continued to rally. The Markit iTraxx Europe index was about 2bp tighter at 65.5bp, while the Markit iTraxx HiVol tightened by a similar amount to trade at 92.5bp. The Markit iTraxx Crossover index was 12bp tighter at 384bp. All three indices gave back some of their gains in the afternoon after a weak US opening.

The bullish reaction to Friday’s disappointing US jobs report may seem perverse. But the report cemented expectations that US monetary policy will remain accommodative for the foreseeable future. It is this policy stance that has made risky assets so attractive, so it is unsurprising that the markets have consolidated their gains.

The interest rate outlook was not the only factor driving spreads today. China released figures showinga 17.7% rise in export in December, the first rise in 14 months. An increase was expected but the scale of the rise was a surprise. The figures helped commodity-related names to tighten, including Alcoa. The US aluminium producer is schedule to kick-off the earnings season after the close today.

Markit chart of Heineken and SABMiller CDS

In fact, the majority of single-names tightened today, and the names that did widen saw only modest movements. Banks were among the strongest performers, as were brewing companies. Heineken announced the acquisition of Femsa‘s beer operations for an enterprise value of EUR5.3 billion. The deal will give it access to the fast-growing Latin American market and help it to expand beyond its core European market, one of the most competitive in the world. Credit investors welcomed the deal as it will be all-share and not impinge directly on the balance sheet. SABMiller also tightened, credit investors cheering the firm’s decision to pull out of the running for Femsa.

However, the sovereign CDS market failed to join in the broader rally. The FT reported that Portugal is under threat of a downgrade from Moody’s, the rating agency citing the country’s burgeoning budget deficit. A one-notch downgrade would bring Moody’s into line with S&P’s AA- rating. The report had some impact in a thinly-traded market, with Portugal’s spreads widening by about 8bp. Other peripheral sovereigns, namely Spain, Italy and Greece, widened in sympathy.


The Markit iTraxx SovX Western Europe index widened by about 1bp and is now trading wider than the Markit iTraxx Europe index for the first time (see chart above). The last time they converged was during the height of the banking crisis in Q1 2009 (when SovX was a theoretical index). The two indices are not a perfect match as the geographical weightings are slightly different. But the index movements still reflect how corporate credit has benefited at the expense of deteriorating government finances.

In North America tightening names dominated, shrugging off weak stock markets. The Markit CDX IG index was trading around 76.25bp, about 1.5bp tighter than Friday’s close. Earnings season doesn’t really gain momentum until next week, but Alcoa’s results after the close will affect sentiment tomorrow. The major earnings release comes on Friday with JPMorgan, the first of several banks expected to post strong results, though the bonus payouts will garner the headlines.