Credit default swap spreads spiralled wider worldwide on Wednesday as low volumes and bearish sentiment drove the cost of both sovereign and corporate default protection to unprecedented highs.
The Markit iTraxx indices for European investment grade and junk debt jumped to new records while cds written on the debt of the UK, US, Italy, France, Spain and Germany were at all-time high levels.
The cost of protecting against default by the United Kingdom now stands at 105 basis points, up from a close of 99bp on Tuesday. This means it costs €105,000 for a 5yr contract to insure UK debt.
To truly comprehend the explosion in the UK’s CDS spreads one just has to remember that at the start of February 2008 five-year contracts were trading at a respectable 8bp.
The fact that Malaysian five-year CDS trades at 301bp, and Peruvian spreads at 344, puts the UK price into an ever bleaker perspective.
One trader in sovereign CDS from a European bank said the jump in UK spreads was part of a new demand from equity investors looking to hedge their exposure to the country. The fact that in the event of a UK default their counterparties would most probably not be in the best mood/state to keep their side of deal is probably seen as a mere technicality.
Meanwhile the news from the mainstream corporate credit derivatives markets is no less bleak. The Markit iTraxx Europe index of investment grade CDS, an index populated by many European banks, widened by 4.8bp to an all time high of 191bp.
The iTraxx Crossover composed of 50 mostly-junk rated names also burst through its series record to 962bp, a jump of 18.6bp.
A big mover in the Europe index was Total SA, the French oil major, after news – broken yesterday on FT Alphaville – that it was readying a bid for the Canadian energy producer Nexen. Total’s five-year CDS spreads widened by 46 per cent in early trade, bursting wider to 150bp from 103bp.
Overnight in Japan,the iTraxx Japan index – surprise, surprise – reached its own record of 365bp, up from 328bp.