This derivative market is not a parrot. It. Is. Not. A. Parrot.
It is a chicken!
Why? Cutting it’s head off only means it’s going to run around, spraying blood all over the bond market. Case in point, Pollo:
FT Alphaville doesn’t mean to insinuate causation in the above. For every chicken, there’s an egg, and we’re not saying which came first. Though we suspect in this particular situation, with Italian debt less popular as collateral due to increasing yields (and hence bigger haircuts), at least some of the bonds may be a bit ahead.
Anyway, back to the bloodbath and over to the eurozone core, Germany:
It looks like trading was fairly muted in sovereign CDS yesterday, when one extrapolates out from the activity on the Markit iTraxx SovX Western Europe, compared to the previous five days. So one does wonder what the action will be off the back of today’s moves.
In terms of corporate indices:
And the worst performers therein:
Ever since that US money market run, the French banks just haven’t been themselves, have they? As for Credit Suisse… we’ll just note the timestamp difference for lack of a better explanation.
And before pondering why the CDS chicken hasn’t stopped running around yet, we remind you of how Basel III has served to entrench the use of CDS to manage CVA.
The CDS market is not dead yet. It thinks it’ll go for a walk.. uphill, as the case my be.
Related links:
Sovereign volatility puts Basel III CVA charge in spotlight – Risk
If sovereign CDS is no longer an effective hedge then who’s in trouble? – Bond Vigilantes
Sovereign CDS questions remain – IFR
RIP DM Sovereign CDS (2006-2011) – Macro Man