Protecting European corporate debt against default became more expensive than ever before on Friday, with the indices of investment grade and risky debt hitting all-time highs.
Traders and analysts said they thought a CDO or CPDO was being unwound. Unwinding one of these structures involves buying large amounts of protection through the credit default swap market, which pushes the cost of protection higher.
The iTraxx Crossover of mostly junk-rated credits pushed to 537 basis points in late morning, meaning it now costs €537,000 to protect €10 million worth of Crossover debt against default over five years. It reached its previous high (about 530bp) at the height of the global equity sell-off last month.
The iTraxx Europe index of investment-grade debt widened to record levels too, up 6.6bp to 96.9bp.
The credit market has been worried about the possibility of CDO and CPDOs being unwound for some time, as rating agencies re-configure the way they are rating which can trigger unwinds — and huge losses for the investors involved.
UBS unwound a CPDO in November, causing around a 90 per cent loss for investors.
“The traders have been manic all morning,” said one strategist. “It looks like there’s a CDO unwind in there or a CPDO, particularly within financials.”
