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.