Credit Default Swap Prices Up Sharply This Week

Credit default swaps are insurance against defaults, and can be written on specific entities or on indices. Higher CDS prices mean the protection sellers require higher payments to assume the default risk.

CDS prices increased sharply this week for the logical suspects, namely, commercial banks with substantial real estate exposure and homebuilders. From Bloomberg:

The risk of companies defaulting rose the most in more than two months this week after U.S. reports showing a slowdown in jobs growth and manufacturing stoked concern that the economy will sink into a recession.

Credit-default swaps tied to the bonds of mortgage lender Countrywide Financial Corp., homebuilder Lennar Corp. and Citigroup Inc., the biggest U.S. bank by assets, increased. Defaults may rise almost seven-fold to 2.25 percent this year, analysts at New York-based JPMorgan Chase & Co., the biggest underwriter of high-yield, high-risk corporate bonds last year, said in a report yesterday.

“There’s more worry about it, especially as most indicators are pointing in that direction,” Scott MacDonald, head of research at Aladdin Capital Management LLC in Stamford, Connecticut, said of investor sentiment about a recession.

Contracts on the Markit CDX North America Investment Grade Series 9 Index of 125 companies rose 4.5 basis points to 88.25 basis points at 1:36 p.m. in New York, according to Deutsche Bank AG. The index climbed more than 11 basis points this week and is poised for its biggest increase since the period ended Oct. 19. A basis point is 0.01 percentage point.

In Europe, contracts on the Markit iTraxx Crossover Series 8 Index of 50 companies with mostly high-risk, high-yield credit ratings jumped 20 basis points to 388, according to JPMorgan. The index rose 50 basis points this week, Bloomberg data show.

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  1. ajw

    The only surprising thing is how long it took for the swaps to start widening like that, especially given the performance of ABX and CMBX.

    How frustrating not to be able to play this directly as an individual!

  2. Anonymous

    NEW YORK (Reuters) – Bear Stearns Cos (BSC.N: Quote, Profile, Research) officials are expected to meet in the middle of January with U.S. prosecutors to discuss the failure of two of its hedge funds, CNBC television said on Friday.

    The funds, the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund, sought protection from creditors over the summer after investing heavily in collateralized debt obligations backed by subprime mortgages.

    Bad bets on subprime mortgages and related write-downs led to an $854 million fourth-quarter loss at Bear Stearns, the first loss in the history of Wall Street’s fifth-largest investment bank.

  3. foesskewered

    ajw, would you feel the same should those protection sellers start going the way of some bond insurers? Maybe a chinese saying is applicable; (summarised) to lose a horse may be a blessing in disguise; losing that investment opportunity may just save you your fortune?! so cheer up!

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