After many weeks of cumulative derisking, the CDS market rerisked violently, most notably in the Consumer Goods and Consumer Service sectors, where a total of $169 billion in net notional open interest rerisking occurred. One explanation is that the big move is due to unwinding of new issue basis trades put on over the past month as horrendous companies issued all sorts of garbage debt. As the new issues came at a negative basis, traders couldn't wait to offload both legs of the trade. Yet oddly, neither CDS nor bonds in the consumer realms dropped/widened last week, meaning that any attempt to explain this market is a waste of time. Also, someone has now has taken the place of a reincarnated AIG, selling CDS for trash consumer companies left and right. Total cumulative net short open interest since early April dropped from over half a trillion to roughly $350 billion, mostly as a result of the precipitous rerisking in assorted consumer names (from $300 to $130 billion).
Sector-wise, only sovereigns saw a net derisking. Again, the emphatic collapse of consumer risk was highlighted by the over 21 thousand contracts amounting to $155 billion in consumer services unwound this week.
Last week had total gross outstandings of $27.8 trillion, based on $15.3 trillion in single name CDS, and an ongoing reduction in index tranches by $100 billion to $12.5 trillion, but nothing like the $1 trillion + index implosion witnessed last week. The drop in index notional and single name notional is further evidence of the unwind in basis trades.
In the single-name category, starting with the deriskers, most of the usual suspects were present, including the inverted sovereign reriskers such as Brazil, France, Belgium, UK, Italy etc. Notable is the inclusion in the top 20 of GM and GMAC, ironically after the automaker's bankruptcy announcement, as well as troubled CCU and not as troubled Southwest airlines.
In the rerisking category AMR seems to have gotten some serious love, as well as Federated, Bombardier, Conti and Citi. Everyone else is essentially in their expected positions.
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