The Sovereign CDS-To-Leverage Correlation
As more and more of the broad public figures out what this thing called sovereign CDS is, the next logical question (especially for algos and correlation desks) is whether or not sovereign leveraged levels can be gamed, or is there any specific correlation that can be arbed as the dominos start to fall (not everyone has the luxury of printing limitless amount of the world's reserve currency). Below we present a chart correlating the CDS with the Debt to GDP ratios of various indicative countries. The chart excludes the outliers of Argentina, Venezuela and the Ukraine, which even though having less than 100% Debt-to-GDP are all trading 1000 bps and wider.
Is there a correlation here? You decide. The R2 is 0.5143, which probably means that algos will gradually start to flatline the correlation as more and more sovereign CDS-trading players emerge.
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