Threat of regulation puts pressure on US CDS markets
The threat of increased regulation in the US financial services sector kept widening pressure firmly on US corporate credit default swap markets throughout the end of January, according to a report by GFI Group.
While initial moves at the start of the year were tighter, more challenging political rhetoric, combined with greater concerns that the People’s Bank of China might start to tighten monetary policy sooner than had been anticipated, encouraged more creditors to buy protection.
GFI says this is perhaps understandable following the solid credit rally through the latter half of 2009. Banks and brokers saw the most significant deterioration in risk, with consumer staples names also seeing pronounced widening pressure. Although typically viewed as more defensive, the staples group started moving wider from low absolute levels.
European credit markets quickly reversed a bullish end to 2009, with the iTraxx rallying off tights of 65bps to close the month at 83bps, back above the 80bps level that had proved such strong support in the fourth quarter.
The bearish tone was set by the financials index which pushed out from 63bps to 90bps, closing the month near the widest premium to the main corporate iTraxx since the indices were first created over 5 years ago.
Banks were the focus; more specifically it was the Greek, Spanish, Portuguese and Italian banks that drew most concern – a direct result of increased default risk being priced in to the sovereign CDS of those more highly indebted eurozone nations. By the end of the month, sovereign and financial concern had spread to the incumbent telcos and utilities of the same nations.
In Asia, much of the focus remained with the Japanese sovereign contract through January, with Standard & Poor’s downgrading their Long-Term Credit Rating Outlook to negative from stable. Specifically, S&P highlighted their concerns that the political administration in Japan lacked a sufficiently credible plan to improve the fiscal position of the country.
Elsewhere in the region spreads also moved wider, driven by concerns over growth in China, and also due to contagion from the Japanese sovereign. Volumes remained most heavily concentrated in the Japanese blue-chips, as well as macro instruments.
Sovereign risk was the watch word at the turn of the year, and concern over sovereign default in Western Europe continued to rise throughout January, according to GFI. Mounting budget deficits, accounting discrepancies and hesitant political action drove the Western European SovX to new highs, and a premium to the corporate iTraxx.
Greece captured the headlines, though Portugal and France moved more in percentage terms over the month. Spain and Germany were also not that far behind, as credit traders suggested that trouble in Greece is an EU-wide problem, and FX traders sold Euro as a direct result.
Elsewhere, sovereign risk was better contained, though the Ceemea SovX did trade ten per cent wider from creation, two weeks into January. In Latin America, Brazil led the widening, though modest in comparison with activity in Europe, whilst Venezuela was narrower on the month. S&P raised their outlook on Venezuelan debt after the country devalued its currency early in January.
GFI Group is a provider of wholesale brokerage, electronic execution and trading support products for global financial markets.
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