Sovereign CDS

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Euro Sovereign CDS Rerack: Germany Hits Record; Belgium Imploding





Two months ago we said core European default risk is about to surge on risk transfer fears. This morning German CDS just hit a record. Yesterday, and on Friday, we said Belgium CDS is about to be monkeyhammered. Sure enough, Belgium is the worst performed of all European sovereigns, +18 on the day and soaring and threatens to go offerless as we type on imminent Dexia nationalization fears. And there's your alpha for the day.

 
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EFSF And Sovereign CDS Pitchbook Updates





Yesterday was a big day in the market for EFSF and Sovereign CDS. The announcements were big enough that some junior associates must be scrambling to update their pitchbooks. Here are my thoughts on what changes need to be done to the pitchbooks and the trading ideas that come as a result.

 
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UK Continues To Be A Top Sovereign CDS Derisker





After taking a brief break last week, the UK is once again firmly in the top sovereign deriskers: a place it has held with pride for almost two months now. Summing up cumulative net notional exposure on the UK based on just the last several weeks results in a net short exposure of well over $3 billion. Someone has now amassed a huge short on the British Isles. Curiously, the country that was actually the top derisker in the past week, with $420 million in net notional change, was Brazil, the same Brazil which today decided to not lift any offers in its 2021 Fixed Coupon Bond auction. Is this the next hotbed of instability? Look for at least one more week of aggressive derisking before confirming this trend. Turkey completes the trio of top deriskers, with $172 billion in CDS. Surely with the prior week ending on May 28, there is no way anyone could have hedged for an Israeli incursion of Turkish ships ahead of time. On the other end, some of the names that have been making the news recently, have seen some material rerisking, probably based on short positional unwinds: the top five were the US, Japan, Austria, France and China. After tonight's news out of Tokyo, look for Japan to take its rightful place at the top of this table.

 
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So On This Whole Naked Sovereign CDS Ban...





There are 4 hours until midnight in Germany. There are trillions in gross sovereign CDS notional. Germany alone had $71.4 billion in Gross CDS notional and $13.3 billion in net according to DTCC. Add up all of Europe and you get half a trillion. How on earth will the German market unwind these with all European traders already long gone. We also make the generous assumption that US CDS traders are still around: most of the BSDs tend to leave for the nearest Marriott Garden Inn by 1pm. So with naked CDS positions now verboten, who will be allowed to sell CDS? For a symmetric hedged transaction, anyone selling CDS (long credit), would have to be short cash govvies to be permitted to sell CDS. And who in their right mind would disclose that they are short anything. This is the most ill-thought out regulatory plan in the history of capital markets, and that, shockingly, includes the Frankenstein monster created by our own lame duck coruptus in extremis senator.

 
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Jim Rogers Joins The "Let Greece Burn" Bandwagon, Blasts The Sovereign CDS Fearmongers





While we are not sure how Betty Liu feels about Rogers' invitation to come eat some Wienerschnitzel, what is certain is that Greek PM Papandreou is not too happy with the commodities pundit right about now. When asked should Europe bail out Greece, Jim says: "No, of course not, they should let Greece go bankrupt. It would be good for the euro, it would be good for Greece, it would be good for everybody." Alas, more true words have rarely been spoken. And with every financial professional already on the same side of the boat as Rogers, politicians are now left on their own to do what they know best: i.e., the wrong thing...and over and over again, and if someone can be blamed (evil, evil CDS speculators come to mind), so much the better. Also, should anyone wish to take a brave foray into the political arena (which appears is now the best paying job in the world, incidentally, just after Goldman CDS traders, hehe) on the crest of the anti CDS bashing, now is the time. It appears quite a few have risen to the challenge.

 
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Sovereign CDS Ban On Deck; Next Up: Any EURXXX Short Recommendation To Land You Straight In Jail





“We must succeed at putting a stop to the speculators’ game with sovereign states. We can’t allow speculators to be the profiteers of Greece’s difficult situation. Derivatives must be curbed.” - Angela Merkel

 
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Putting The Question Of Evil Sovereign CDS Speculators To Rest





Dear Mr. Bernanke, dear idiots at the SEC (to paraphrase an extremely observant Harry Markopolos), and dear everyone else who is just an empty chatterbox and a mouthpiece for other conflicted interests, who claim baselessly that it is all the CDS traders' fault that Greece is about to be flushed down the toilet. We present to you the ratio of cash to synthetic (CDS) exposure. As Bloomberg points out, the "maximum amount on the line if 10 government defaulted, $108 billion, is 0.98% of their combined $11 trillion in sovereign debt." So these less than 1% marginal players are now blamed for the end of civilization? How about blaming sellers of cash bonds? Or, here's an idea, how about actually looking at the root cause, like for example governments, who with the assistance of Goldman Sachs, have lied for a decade about the true state of their finances, and have misrepresented on sovereign prospectuses all their economic exposure for years, which was subsequently signed off by countless auditors and lawyers. The corruption goes to the very top, and the SEC idiots are now investigating CDS traders? There will be no end to the insanity and lunacy, until there is a revolution in this country, or until CNBC allows a rational and objective person to talk on its network, whichever comes first.

 
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All You Ever Wanted To Know About The Current Sovereign CDS Market But Were Afraid To Ask: The CDS-Bond Basis, CDS Curve Flattening, Volatility Skews And More





Now that sovereign CDS traders are about to reprise the role of Jason Bourne, and be hunted by international intelligence agencies just because under the not so wise advice of their prime brokers and preferred CDS salespeople, they dared to buy a minimum amount of $5 million in 5 year CDS of [Spain|Portugal|Greece], it is worthwhile to expose this sovereign CDS "thingy" once and for all. The following BofA research report will introduce not only the basics, but get into some of the more arcane concepts for those who feel that the need to roundhouse Spanish intelligence officers is about to reach boiling point (call it 30-bp spread induced synesthesia).

 
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Rumor Of Sovereign CDS Ban Picking Up Steam, Lifting Market





As reported earlier, some more CDS trader talk:

I m hearing and being asked from a few sources that the CDS markets in the sovereign (Greece, Dubai. Etc) nations are going to “banned “ from trading to avoid a BSC or LEH like collapse. I personally have no idea if there is any truth to the story  but it seems to be just going around in the last half hour. Obviously Greece is on the forefront of traders minds and I don’t know if a “ban” in trading this stuff is a good or bad for the markets  (trades seem to think would be a huge positive)…. But I would appreciate any insight.

Of course, the fact that the mechanics of this "ban" are so inconceivable as to make the rumor beyond ridiculous, is precisely why everyone is terrified it will be true. After all this is precisely the kind of galactic stupidity/insanity we have grown to expect out of the 3 neurons shared between Bernanke/Bair/Shapiro/Geithner.

 
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Sovereign CDS Update - Bloodbath





Gold mania has now moved to sovereign CDS, where the top 5 names are flying again. Biggest movers are the usual suspects: Dubai, Greece and Latvia. As Zero Hedge has been saying since it hit about 22 bps, CDS on the United States will soon likely see a replay of 2008 action. As of today it traded at 36, 2.5 bps wider. And when this starts really moving, watch out.

 
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Dubai Sovereign CDS Surges 130 bps As Dubai World Seeks Debt Standstill





Trader commentary:

The widening of CDS spreads on Greek Sovereign debt has caught some attention and now Dubai CDS spreads are on the move: Commentary on Dubai from the EM guys...Dubai in focus as they do another $5b local tranche in the $20b Abu Dhabi program, then ask for extension in Nakheel maturities for 5 months. Very strange. Thought whole point of issuing the bonds was to pay for the Nakheel debt. Dubai CDS +130bps from o'night level of 318 ... seems to be hitting the European markets now.

Sequential popping of bubbles to commence shortly.

 
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Sovereign CDS Are On The March Again





With today's news out of Ukraine, which may or may not be a dud (although with the economy hardly functioning courtesy of massive quarantines and business shut downs) sparking off what may or may not have been a a huge dollar squeeze (we are still waiting to hear back from the ICE), one observation is that sovereign CDS spreads are back front and center. As we discussed recently, Japan CDS has been ploughing ever higher, yet recent data indicates that the deflating island nation is not alone.

 
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Sovereign CDS As A Proxy For Relative Risk





Interesting observation, correlating the ratio of US to Japan CDS (especially with Japan CDS' tightening 7 bps while USA CDS was 2 bps wider) versus the JPY/USD (inverted axis). Is the sovereign risk trade trying to find other conduits for expressing relative risk in this environment where no sovereign risk seems to exist anymore as all countries are expected to print, print, print all their problems away.

 
Tyler Durden's picture

Sovereign CDS As A Proxy For Relative Risk





Interesting observation, correlating the ratio of US to Japan CDS (especially with Japan CDS' tightening 7 bps while USA CDS was 2 bps wider) versus the JPY/USD (inverted axis). Is the sovereign risk trade trying to find other conduits for expressing relative risk in this environment where no sovereign risk seems to exist anymore as all countries are expected to print, print, print all their problems away.

 
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