CDS

Last week was characterized by unprecedented rerisking in financial names, to the tune of $145 billion in notional change, representing over 28 thousand contracts. This was caused by an imbalance in New Trades ($173 billion) versus Full Terminations ($297 billion). Was the credit market a little trigger happy to say all green shoots in financials are in place? Or merely the equity driven short squeeze has forced even the usually cooler fixed income heads to push the "cover" button.

Last week was characterized by unprecedented rerisking in financial names, to the tune of $145 billion in notional change, representing over 28 thousand contracts. This was caused by an imbalance in New Trades ($173 billion) versus Full Terminations ($297 billion). Was the credit market a little trigger happy to say all green shoots in financials are in place? Or merely the equity driven short squeeze has forced even the usually cooler fixed income heads to push the "cover" button.

With any predictive quality the equity market might have had long dead and buried, the only somewhat sane place left for investors looking at even a modicum of rationality is the CDS market. And something there is afoot, at least when looking at the Merrill - BofA decompression trade, which over the past few days is getting back to levels last seen when Lewis was discussing splitting investment from commercial banking. The outcome of tomorrow's shareholder meeting is getting more and more interesting: judging by CDS levels, one could ask if someone knows something?

With any predictive quality the equity market might have had long dead and buried, the only somewhat sane place left for investors looking at even a modicum of rationality is the CDS market. And something there is afoot, at least when looking at the Merrill - BofA decompression trade, which over the past few days is getting back to levels last seen when Lewis was discussing splitting investment from commercial banking. The outcome of tomorrow's shareholder meeting is getting more and more interesting: judging by CDS levels, one could ask if someone knows something?

The CDS market continues going from dead to deader. It seems the lack of liquidity is somehow spilling over into the CDS realm. Total notional barely moved up from $14.6 billion to $23.6 billion, however the number of contracts was half the prior weeks, at 9,909 total. Notable notional rerisking occurred in the basic materials ($10.7 billion) and financials ($14.5 billion) sectors, while sovereigns continued to see derisking to the tune of $12.4 billion.

The CDS market continues going from dead to deader. It seems the lack of liquidity is somehow spilling over into the CDS realm. Total notional barely moved up from $14.6 billion to $23.6 billion, however the number of contracts was half the prior weeks, at 9,909 total. Notable notional rerisking occurred in the basic materials ($10.7 billion) and financials ($14.5 billion) sectors, while sovereigns continued to see derisking to the tune of $12.4 billion.

Such is the conclusion based on a Bloomberg article that notes that MGM Mirage is being pressured by none other than Icahn and Oaktree Capital.

The past week was virtually dead in CDS trading, with a mere $14.6 billion in notional changing hands, however consisting of surprisingly robust 18,776 contracts. The prior week derisking in sovereigns reversed, and last week saw a $24 billion derisking in the space. All other sectors were significantly unchanged, with the exception of consumer services where $11.2 billion in protection was unwound.

Due to a flood at Paper Street HQ, numerous files were destroyed last week, among them the interim weekly CDS report. Unfortunately, this means we need to restart the CDS tracking from scratch this week. As there is no prior week reference just take our word for what has been happening: not a whole lot in credit land.

Or so says ING, predicting a 40% rise in HY European CDS. ING is recommending (and likely axed in) a trade where accounts buy Euro HY CDS and sell IG CDS.

As Zero Hedge reported first, strange things happened in January and February when AIG was allegedly unwinding CDS trades with its trading counterparties. As we reported, the taxpayer funded loss that AIG presumably experienced on wholesale CDS unwinds may have well been the reason for the banks' reported trading profitability in the first 2 months of the year.

As Zero Hedge postulated a month ago, the VIX - sovereign CDS inverse correlation is becoming more and more evident. Today's action is representative: as VIX continues to slowly trickle lower, US protection is 5 wider. With the G20 pledging trillions to battle every cough and sneeze of the markets, the question becomes what does all this mean for sovereign default risk, and thus VIX, and thus equity markets.

As Zero Hedge postulated a month ago, the VIX - sovereign CDS inverse correlation is becoming more and more evident. Today's action is representative: as VIX continues to slowly trickle lower, US protection is 5 wider. With the G20 pledging trillions to battle every cough and sneeze of the markets, the question becomes what does all this mean for sovereign default risk, and thus VIX, and thus equity markets.

Bank CDS post-FASB:

BAC 377bp -20,
C 640bp -20,
JPM 190bp -10,
WB 292b -15,
WFC 292b -15,
MER 545b -20,
MS 382b -15,
GS 287b -10

compliments of Mojakus

As we have noted before, we are big fans of the the clearinghouse idea for derivatives - particularly CDSs.  Overall, Geithner's plan is going to have a tremendous influence on the financial markets going forward and Zero Hedge is closely following any details that emerge.