Wednesday, July 1, 2009

Latest DTCC CDS Update (Week Of June 26)

With the roll behind us, rerisking is back on the table. Of course, judging by the VIX one would think all the risk is out of the game right? Wrong: what is happening is as VIX is crashing, there are non-margin transactions leading to increased net open CDS interest, in effect implying investors are aggressively insuring themselves for when the shit hits the fan. Anyone following the VIX alone as an indication of risk appetite is blindly ignoring the credit market's expectations for what may happen ahead. $31 billion net notional in CDS derisked, on just over 4000 contracts.

Segmented action indicated a run to safety trade: the bulk of rerisking action was in Healthcare and Consumer Goods ($30 and $13 billion, respectively), while Consumer Goods, Sovereigns and Industrials saw more people buying protection.

The week saw total gross outstandings of $26.5 trillion, based on $15.3 trillion in single name CDS, flat from the prior week, while the index collapse trade has picked up again with a $1 trillion drop in gross notional over the prior week (this is big). Seems our conclusion that the index liquidation is over, was premature.

In single names, aside from the usual sovereign action (Italy, Portugal, France, Spain and Austria all getting the finger), a new name that has made a repeat appearance and that would make the CNBC pundits nervous, is General Electric Capital Corp. Not too good for CNBC parent company GE. On the rerisking side, Korea, Turkey, Fujitsu, Wells Fargo and Banco Santander rounded up the top 5. Other top 20 notables were Citi, Greece, Russia, Interval Acquisition, Toll and JC Penney.

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