Thursday, February 26, 2009

Adventures with Sovereign CDS, Cont.

By Felix Salmon (

Nick Gogerty notes today that the 5-year Treasury note yields 1.92% even as five-year default protection on the US costs 100bp. But it's Tyler Durden who's found the really crazy stuff: a list of 23 European corporates whose CDS spreads are trading through their respective sovereigns. And to make things even better, a lot of them are financials, of all things: IntesaSanpaolo, for instance, is trading at 170bp, compared to Italy's 181bp, while Munich Re is at 72bp, compared to Germany's 87bp. In England, Safeway, at 55bp, is more than a whole percentage point through the UK, which is trading at at 156bp.

Combine this with the CDS basis trade, and you get all manner of weirdness: Tesco's CDS spread is 16bp through the sovereign, but it just issued two bonds at 250bp over the sovereign. All of which basically means that sovereign CDS spreads are meaningless. And no, I still don't have any clue who's buying protection on these names at these prices, especially not on the US at 100bp.

1 comment:

Anonymous said...

Hey Felix, we have been looking at this and I think (some of) the sovereign widening is due to techncials from hedgers covering the potential 'end' of the AIG reg arb CDOs in Europe. Main flow we see/hear is from European banks and hedgies...FYI, take a look at a basket of UK, Spain, Italy, France, Germany CDS relative to Main ExFINLs - i like this for a decompression trade.