A year ago, Nicholas Vause of the Bank of International Settlements wrote about “Counterparty risk and contract volumes in the credit default swap market” and pointed out the relative increase in shorter maturity contracts.
Using a couple more surveys than he had then, we get (click to expand):
Back in the day (2006/2007) when the market was securitising everything that had even a remote prospect of cash flows (or a derivative thereon), there was a move up the curve from the 5-year point to the 7-year point. This was purely a move to chase yield. Everyone was piling into the market and the 5-year just didn’t pay enough any more. The tendency to do this peaked sometime around the spring/summer of 2007, as can be seen in the above table. It’s been downhill in maturity terms since.
Here are spreads for context:
Maturities over 5 years are still more common than those under one year, but it looks like the later may catch up with the former, particularly in the context of such near term headline risks.
Another metric to add to the financial distress index then: average life of outstanding CDS contracts.
Related links:
BIStimates of the over-the-counter derivatives market - FT Alphaville
Counterparty risk and contract volumes in the credit default swap market – BIS