Credit is now officially done with the rally. While last week's unprecedented $215 billion in CDS purchased will likely be a record for a while, this week saw yet another substantial $120 billion in net notional increase, based on 5,770 contracts exchanged. Also, net cumulative notional CDS by sector has surpassed the half a trillion mark since early April. This means that at least in CDS, asset managers are buying unprecedented amounts of rally correction protection. Soon even the financial net cumulative notional will surpass 0, while Consumer Goods And Services has seen almost $300 billion in CDS purchases over the past 9 weeks. When the consumer stock snap back occurs, based on the disbalance between equity and credit performance, it will be so vicious it will make the heads of those who are unhedged spin with an RPM that would make Ayrton Senna proud.
The only consistent sector of derisking was basic materials with $20 billion in CDS sold. Every other sector saw a landgrab in CDS last week, following through on the hungry, hungry hippo action of the week before.
Last week had total gross outstandings of $28.1 trillion, based on $15.5 trillion in single name CDS, and a dramatic and surprising reduction in index and index tranches of almost $1 trillion to $12.6 trillion. Based on preliminary conversations, this could be related to the peculiar unwind-like behavior we witnessed last week: did a major index trading hedge fund blow up?
Taking a look at single names, in the derisking category someone really did not like JP Morgan, and bought CDS hand over fist however without pushing the market too wide. Net notional change was an almost record $2.1 billion in the name alone (on $52.1 billion in gross) on a ridiculous amount of contracts. The balance was, again, the usual suspects: Austria, Spain, Greece, with Brazil, the U.K. and France filling the remaining sovereigns. Austrian bank Unicredit made an honorable appearance: are credit traders starting to be concerned about Central/Eastern Europe again? They were definitely prescient of the Latvian blow up yesterday. Other banks that people did not feel too hot about included perrenial dunces Bank of America and Wells Fargo.
In the rerisking category, Credit Suisse keeps on being the dealer favorite, with quite a few sovereigns making the de- to re-risk rotation. An odd name here was RR Donnelley: potentially on post-event profit taking. Also amusingly Toll and Home Depot saw substantial rerisking: maybe the credit market isn't all that smart after all?
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