The market for credit default swaps vacillated between cautious optimism and outright pessimism on Tuesday, as traders pondered the implications of falling oil prices, dire housing data, soothing words from Ben Bernanke and the death of IndyMac.
In the US, the investment grade Markit CDX NA 10 index traded as wide as 151.04 basis points but by lunch time in New York had retreated to 146.97bp, marginally tighter than Monday’s close.
Across the Atlantic, the Markit iTraxx HiVol index reached its widest level since its roll in March, as all but one of the underlying constituents widened, according to Markit analyst Gavan Nolan:
The building materials sector, one of the worst performers in recent weeks, suffered disproportionately, with Saint Gobain’s spreads exceeding record wides reached in March.
Unsurprisingly, retailers such as Next and Marks & Spencer were also among the widening credits. A British Chamber of Commerce survey provided further evidence of a slowing economy and the Director General David Frost’s view that there is a “real risk of recession” is gaining credence.
Irish banks were also under pressure after investors reacted negatively to a Bank of Ireland trading statement. Like Bradford & Bingley, BoI has significant exposure to the high risk buy-to-let and self-certified mortgage markets, causing concerns over asset quality deterioration.
The HiVol closed 3.25bp wider at 201.75bp, versus an intra-day wide of 210.75bp.
Elsewhere in the market, the CDR Counterparty Risk index suggested that investor jitters over the major players in the CDS market have not gone away.
The index, a barometer of the perceived risk associated with the 15 banks and brokers with the most concentrated exposure to CDS trades, widened 3bp during the week ended today to 143.88bp, according to Tim Backshall, chief strategist at Credit Derivatives Research.
European banks continued as the worst performers of the week (4.5% wider versus US financials only 1.1% wider) thanks to weakness early in the week even though the extra day of trading across the pond saw some profit-taking pushing the European financials off their widest levels. Comments by Swiss regulators regarding the capital requirements at UBS and Credit Suisse saw UBS pop wider (+22bps to 139.5bps on the week) and less so Credit Suisse, significantly under-performing the rest of the major CDS counterparties.
US banks modestly underperformed US brokers despite Merrill Lynch and Lehman Brothers ending the week back at their widest since mid-March. Goldman Sachs and Morgan Stanley were range-bound near recent wides as Bank of America and JP Morgan were the worst of the US financials (with the former under pressure as the Countrywide deal closed and the latter from concerns of the Bear Stearns asset valuations).
Dispersion rose slightly on the week as the riskier names widened more than the tightest names in absolute terms but systemic fears remain high. We are seeing the spreads of all of the names generally tracking wider and moving closer together as investors appear to see more contagion and less idiosyncratic issues even though headlines remain replete with discussions of clearing house progress.”