Investors’ faith in the creditworthiness of their counterparties to trades in the market for credit default swaps decline this week amid a slew of negative headlines.
Counterparty risk, as measured by the CDR counterparty risk index, rose 11 basis points or seven percent during the week to Monday, closing at 163bp.
All major global CDS counterparties traded wider on the week, with the exception of Wachovia, according to CDR data.
Per Tim Backshall, CDR’s chief strategist:
Fannie and Freddie continued to drive the news cycle as discussion over Paulson’s “bazooka” drove both GSE’s equity to new lows. With talk of a government bailout morphing from “if” to “when,” focus shifted to the fate of common and preferred shareholders and the knock-on effect to banks left holding the equity bag.
Among members of the CRI, Lehman Brothers moved into rumor-a-day mode with talk of asset (management) sales, Asian investments and CEO departures. Lehman’s CDS widened out to multi-month wides then rallied hard on Friday on news of possible Chinese/Korean investment only to sell off through the end of Monday.
The UK holiday on Monday did nothing to help liquidity as investor’s anxiety was focused on the US financials amid extremely thin CDS markets.
Elsewhere, SocGen’s Suki Mann said the prevailing bearishness in the market “could leave investors with plenty of opportunities given the lack of desire by most to add risk.”
In that sense, fortune favours the brave as dislocations present themselves in an almost desperate market. However, for the contrarians (optimists, that is), the question still remains as one of timing – are we close enough to the bottom yet, or should one keep their powder dry?
