CIT CDS Auction Final Recovery Closes At 68.125

At 2PM Eastern, CIT's CDS auction was priced at a final recovery of 68.125. This was over 2 bps lower than the inside midpoint market announced earlier. Going into the auction, there was $728.98 billion of open interest, indicating that basis traders were a dominant force and eclipsed correlation desks' influence in the auction. The 13 participating dealers submitted $4.5 billion worth of limit order, with an average bid of 65.66, just 3.6% away from the final settlement price, indicating that the option to low-ball into the Dutch auction and get hit on stray bids has effectively disappeared.

The most generous dealer was Nomura whose 30 million in bids averaged 71.1 and had all bid hits. The stingiest dealer was Deutsche Bank, whose 690 million in total bids came in at an only 63.2 weighted average bid price. The largest bidder into the auction was Citigroup, however at 65.7 not much of the total amount was hit. One interpretation of the stinginess is that Nomura, BNP and HSBC's clients were the most desperate to close out existing positions (correlation desks), while DB's UBS' and Barclays clients were the lest incentivized to pay top dollar to settle (basis traders).

As a reminder, the final recovery price is the highest since the allegedly rigged FNM auction in October 2008, in which sub notes ended up clearing higher than seniors at the time, courtesy of Hank Paulson.

Comments

[Hank Paulson]

Is this good or bad for my short equities position that treats me like a 2 year old?

[Jeff Lebowski]

Uh - off topic.  Sheila is starting early... Bank number 1 just went down.

Marla?

Failed Bank Information

Information for Commerce Bank of Southwest Florida, Fort Myers, FL

[Anonymous]

Before you start spreading misinformation about the FNM auction: it wasn't rigged, the cheapest to deliver junior bonds had a higher coupon than the cheapest-to-deliver senior.
The bids are derived from expected net PV (where there is a realistic chance that these coupons will get paid over time), not just notional recovery.