Derisking

CDS Traders Attempting Another European Ambush

Another week, another major derisking of European names. While the drop of China out of the Top 10 can only be attributed to the summer doldrums, the top countries are mimicking the World Cup Final, and are all European, amounting to over $1 billion in net notional derisked in the past week. These are Germany, Italy, Spain, Austria and the Netherlands, with Greece and Poland at 6 and 7, and Brazil, South Africa and Colombia rounding out the top 10. On the other end, by a smaller margin, the rerisking of France and Portugal amounted to just over $500 million in the past week. The most active name was Brazil with 1,109 contracts unwound or almost $10 billion in notional, even as the net change was one of derisking. It appears Europe will have no peace from CDS "speculators" testing out the ground in each and every country, until it the rolling wave of defaults finally sets in as Niall Ferguson stated earlier.

The CDS Wolfpack Is Now Coming After France... China

A month ago, Sarkozy was pissed that Merkel had dared to take the initiative over him and to ban naked CDS trading. Being a stubborn reactionary, this action only prolonged his inevitable decision to do the same (because politicians, being the wise Ph.D's they are, realize fully all the nuances of screwing around with the financial ecosystem). However, looking at this week's DTCC data, we have a feeling he may accelerate his decision to join the CDS-ban team. With a total of 456 million in net notional derisking, France was the top entity in which protection was sought in the past week. In a very quiet week, where the 5th most active name did not even make it past the $100 mm threshold, France was more than double the number two sovereign - Mexico (we are unclear if this is some sort of contrarian move to the Yuan reval, which Goldman was pitching as MXN positive, which means traders likely hedged by loading up on Mexican CDS). But what is probably most notable, is the sudden and dramatic appearance of China in the top 3rd position. Welcome China! And after tonight's surprise PMI miss and the resulting market drubbing, we are confident within a week or two, China will promptly become a mainstay of the top 3, and will quickly rise to the top position, where it rightfully belongs. We are also confident those perennial Eastern European underdogs, Romania and Bulgaria will shyly make an entrance in the top 10 next week.

Daily Credit Summary: June 29 - Equity Catch-up

Today's action in CDS land was negative pretty much across the board with breadth extremely negative as only a handful of single-names managed to eke out gains as there was a quite evident up-in-quality shift. HY names handily underperformed IG names on the day. High beta IG names also underperformed significantly as off-the-run indices underperformed on-the-run once again and the Top 100 CDO referenced names significantly underperformed the broad market.

Daily Credit Summary: June 24 - Risk Never Left (But Italy Did)

Greece was the standout in Europe (and in fact across most sovereigns) with a 60bps decompression today (closing below 1000bps but managing to get above and trade handily upfront for much of the day). This is a 200bps decompression since the roll and while volumes remain marginal, bonds have weakened with the 2-5Y range inverting even more significantly. Calls for 50% haircuts on Greek sovereign debt in the stress tests, and an increasingly glib view of the effectiveness of the stress tests saw FINLs shift wider once again with SEN and SUB moving pretty much in line and notably FINLs and ExFINLs not decompressing. This is interesting as perhaps we are seeing the contagion leaking back into non FINLs (which would make sense via direct channel from lending/credit as well as indirect via austerity/growth slowing).

Global Sovereign Derisking As Greek 5 Year CDS Hits All Time Wide

So much for that Greek bailout plan. Greek CDS are now back at fresh all time highs as the market seems set on not only testing the EU's rescue resolve, but determined to get a fresh new bailout plan entirely. At last check CDS was just shy of 1,000 bps. The immediate catalyst is a Fitch report that says Greece risk has gone up and that the country will need further consolidation in 2011 and 2012. The broader catalyst is that the entire Greek credit market is completely dead (noi cash liquidity) and momentum trading has now arrived in CDS, which is the only place left to express a bearish stance on Greece. Should the spread onslaught continue, we expect all of Europe to follow Germany's example and immediately ban naked CDS shorts across the continent. Luckily, both China and India are now set to open CDS trading of their own.

BP Net CDS Hits Another Record, As APC Weekly Change Is Flat, Implying BP-APC Pair Trade Overhyped

According to DTCC, BP net notional CDS has hit another weekly record, coming in at $1.794 billion on 2,590 contracts as of June 18. This is a change from past week's $1.677 billion net notional outstanding, and 2,072 contracts: an increase of $117 million in net notional derisking as an increasing number of bets on BP's bankruptcy are made. Another very popular name, Anadarko, came in at $1.630 billion net with 3,051 contracts: the exact same notional as the prior week (which however saw 2,877 contracts outstanding). In other words, even as traders derisked in BP, they were flat in Anadarko, implying that a short risk BP - long risk APC trade was not being actively put on in the past week, contrary to media reports of this being a prevalent pair trade. Instead speculators took on unhedged short risk exclusively in BP. Alternatively, we could see accelerated derisking in APC soon as the long risk leg of a possible BP-APC pair trade catches up with FV.

CDS Traders Finally Give UK Reprive, Focus On Heart Of Darkness: Germany And France

For the first time in over 2 months, last week CDS traders ignored their ongoing derisking barrage in Great Britain CDS, and instead shifting their attention to the very heart of European darkness, the two countries that are in charge of it all - Germany and France. There was over 750 million worth of German CDS derisked, in 58 contracts, with France close behind at $728 million. Two other notable names rounding out the top five were Turkey and Spain. Quiet, little Finland was there for some reason. Other name filling out the list of top 10 were Brazil, Ukraine, Korea, Portugal and Japan: all names that have very valid reasons to be concerned about their future, and CDS traders agree. On the other end, rerisking was rampant in Mexico, Slovenia, Holland, Indonesia and Thailand. Most likely these are just hedge pairs as there is no reason why any of these names should be in play. Two names which we will focus on shortly, Romania and Bulgaria, were in no man's land. We expect they will slowly migrate toward the red part of the chart.

Weekly Credit Summary: June 11 - Look Behind The Curtain This Week In Credit

Spreads were mixed this week with indices modestly tighter but intrinsics notable wider as our view of the overlay unwinds into idiosyncratic derisking appears to be playing out in cash and synthetic credit. Europe outperformed US this week with help broadly from FINLs and Sovereigns but the same theme of underlying name underperformance against index outperformance was evident everywhere (especially at the HY/XOver end of the credit spectrum). Watch this week for further bond underperformance and/or skew compression - there is much more going on down here in the weeds than is evident at the aggregate levels and we suspect sooner rather than later this sentiment will spread back up to the indices (and the realities of short- and longer-term funding markets).

UK And US Among Top 5 Weekly Sovereign Deriskers

The week's biggest (sovereign) CDS movers have been released, and we have some new entrants in the most endangered species list. While by now nobody will be surprised that the UK is a consistent top 2 player (coming in this week with $319 million in net notional derisking, this making it the 8th week or so the country has made the top 3), only behind Italy and its $452 million in net notional, and just in front of last week's #1 Brazil, the presence of the United States at #4 should be a little unsettling. It has been months since the US appeared in the top 5. And just like in the long gold case, the same types of existential questions once again arise when the interest in US CDS picks up: who gets to pay off your contracts in the case of an event of default? Elsewhere, the presence of Korea and Turkey (or Australia) in the top 10 should not come as too surprising. On the other end, short covering was violent in CDS of Spain, Hungary and Portugal - Europe's newest lepers. Is the CDS community concerned the EU can actually pull out a rabbit out of the hat that actually works for once? Hardly. The top 10 reriskers also saw the inclusion of France and long-forgotten insolvent Greece.

Daily Credit Summary: June 4 - More Straws, Less Camels

As a reminder, for anyone considering this a buying opportunity (other than for a swing trade) based on rebalancing or mean-reversion should note two things: fund outflows are picking up for risk assets, and, even more importantly in our view, risk budgets will mean that allocations will be materially lower (in their wondrously pro-cyclical manner) as we note IG's three-month realized vol is its highest since NOV08 and HY's three-month realized vol is its highest since OCT07 (higher still if we adjust for intraday vol)!

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.

Daily Credit Summary: June 1 - The Good, Bad, Ugly, Uglier And The Ugliest

All-in-all a very weak close to a worrisome day (especially given month-start rebalancing hopes). Even the positive ECO prints were questionable on the basis of regime-change a month ago and anything more recent was showing a disappointing trajectory. Weakness was evident across all sectors and industries in credit but the stress in the ENRG space are clearly particularly notable (especially given their somewhat safe-haven status that may have hurt so many recently). Levels to consider in IG are 109.5bps as next support with 118.75bps as a decent short-term pivot. HY held above its pivot of 645bps today with next stop 587bps (large range due to recent vol) and a target of 702bps in the short-term.

Daily Credit Summary: May 25 - No Ko Oh No

All-in-all a miraculous day (once again) but with geo-political risk revving up in Asia, liquidity remaining a threat in Europe, and contagion ever-darkening the horizon, the significance of the cash market's weakness/thinness (and concessions) and gappiness in single-name CDS leave us comfortable long risk here for now (625bps or 670bps for nervous-nellies in HY are decent stops and 115.5 and 122.5bps in IG). We almost reached out target for HY-IG today and would perhaps bring up the stop on that to 500bps differential (in line with 625bps stop on HY).
Let's take a breath and re-assess - HY and IG at multi-month wides (OCT09 and JUL09 respectively), short-end of the credit curve underperforming, cash underperforming synthetics, new issue concessions high, HY deals failing, close to close widening today in risk premia everywhere (except stocks...), carry pairs actually weaker on the day, US and EU FINLs wider on the day, sovereign risk rising globally, funding markets stressed, and CP rates starting to crack. Short-term bounces will always happen and we must be prepared for them but rising dispersion in single-names is where we will be spending the bulk of our time (as per today's MFCI strategy article) as an elevated volatility and discrimination-driven dispersion is just what we need to benefit as credit fundamentals re-appear from beneath the liquidity Tarp (pun intended).

Daily Credit Summary: May 21 - Where's The Rally Monkey?

Spreads closed the day weaker after clinging to gains until mid-afternoon and outperforming stocks. A slow-and steady decline in FINLs finally cracked the low activity rally in risk assets but we note IG underperformed HY as stocks sold off helped by the EUR stalling. Cash underperformed synthetic single-name credit once again but the late-day rush for protection suggests investors once again covering with macro overlays - not a good sign for bonds.