First Post-Sovereign CDS Extinction Level Rerack

Yesterday we pronounced sovereign CDS dead (a proclamation which will soon shift to all corporates now that companies are less risky than countries and the vigilantes refocus their attention, as the ability of the sovereign to onboard any more private sector debt is severely curtailed). The reason: the laughable "determination" that a Greek default and 50% bond write down is not an event of default. Maybe not to ISDA's 15 committee deciders (well 14: Barclays should vote no) but it is to the market. As a result, we have seen not only the biggest tightening in IG since May 2010 (11.3 bps tighter to 114.5), but a complete collapse in the sovereign complex, now that it is obvious that in addition to not being a speculative instrument (naked position will be banned in perpetuity), CDS are no longer even a hedging one. Expect the slow, gradual extinction of sovereign CDS, which will merely make the only possible way to hedge long cash govvie position the old-fashioned one: selling.

                         5Y                     10Y             5/10's
ITALY             413/421  -39       404/418      -13/-3
SPAIN            335/343  -42       321/337      -12/-2
PORTUGAL   1010/1040 -85       770/840     -250/-190
IRELAND        690/720  -65       520/590     -180/-120
GREECE          53/56   -6         53.5/57.5    -0.5/2.5
BELGIUM       255/265  -34       252/266       -6/4
FRANCE        163/167  -23.5     182/192       18/22
AUSTRIA      126/134  -20     142.5/152.5     15/20   
UK                71/75   -11.5        88/94        16/20       
GERMANY      72/76   -11.5        92/98        18/22


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