On Thursday we noted that a number of interesting things were happening in the CDS market. Here are some further reflections, via Deutsche Bank’s Jim Reid.
First, Portugal’s 5-year CDS (+28bps yesterday, and +58bps over 48 hours) traded wider than every single name in the iTraxx Main (composed of 125 corporate constituents), except, predictably for Banco Espirito Santo (+70bp wider yesterday to close at 260bp).
Second, there are now 5 members of SovX Western Europe (Greece, Portugal, Ireland, Spain, Italy) that now trade wider than the 8th widest name in iTraxx Main.
Now to put that into some sort of context. Portugal is rated Aa2/A+, whereas the average rating of iTraxx Main is high BBB/weak Single-A.
As such, Reid is telling clients that the cheapest way to hedge macroeconomic risk is to buy protection in iTraxx Senior Financials and Main 125.
Now, all of this carries some chilling echoes of 2008, says the brokerage:
The danger for every risk asset beyond IG credit is that if higher quality assets see forced re-pricing then it surely has to impact the riskier end of markets. The situation is increasingly reminding us of August/September 2008 when the credit market was sending out a strong sell signal to the equity market. Failing a quick sovereign bail-out, the credit markets (through peripherals) are sending out a similar sell signal.
In reality it seems that the market wants to accelerate an issue that the authorities were hoping that time would heal. The likelihood is that the EC will be forced to show more of their hands over the coming weeks or months. If a bail-out comes it may push out the problem and lead to a risk rally but this sort of risk will live on for many years around the Developed world until we see a combination of strong growth, big FX moves (a zero sum global game), higher inflation and/or Sovereign defaults.
The other interesting feature of Thursday’s trading, as we’ve mentioned before, was that for the first time in a long while, the domicile of the corporate impacted its trading.
Says Evolution Securities’ Gary Jenkins:
We have done a quick comparison of the CDS spreads of Deutsche Telecom and Portugal Telecom over the last years to illustrate this point.
Clearly a full analysis would look at a range of companies with different domiciliary, going through the data and company news in minute detail to make allowances for individual credit events during the period in question, but that is too much like hard work for a Friday morning.
As regards company specific credit events Moody’s last changed Portugal Telecom’s rating in March 2007 and Deutsche Telekom in May 2008, so recent spread moves cannot be explained by company specifics. Then onto what the data actually shows:
At the peak of the credit crisis the spread difference between PT and DT reached 46bps… at the height of the boom it was down to 9bps… and currently the difference is 77bps…
Meanwhile, here’s how those sovereign CDS were trading a short while ago
IRELND 5Y 175/185 (+4)
PGB 5Y 237/244 (+10)
ITALY 5Y 160/165 (+8)
GGB 5Y 435/450 (+20)
SPGB 5Y 179/184 (+15)
Related links:
Europe is Lehman-fied – FT Alphaville
Europe is Lehman-fied, part deux – FT Alphaville
And here’s the corporate contagion – FT Alphaville