Credit traders were focused on the quarterly roll of credit-default swap contracts last Wednesday, as investors looked to sell CDS they deemed over-priced. Typically single-name CDS spreads jump in value, as the new contracts have a longer duration and so are worth more than the retiring contracts.
Hedge funds and prop desks were offering to sell 10-year protection in large amounts on names across all sectors with the aim of buying back protection at a cheaper price in the short term. CDS players can pick up around three basis points via this strategy, estimated traders.
Separately, traders were kept busy earlier in the week by Realogy, which saw its cost of protection widen by nearly 200 bps on news Standard & Poor's had lowered it to below investment grade from BBB minus to BB plus. The downgrade followed the news buyout firm Apollo Advisors was set to acquire the company for nearly USD7 billion.
Holders of Realogy paper came into the CDS market to buy five-year protection because a feature of its one and only outstanding bond issue. The note has a so-called poison put that allows investors to sell bonds back to Realogy at face value if ownership changes and the company is downgraded to speculative status by both Moody's Investors Service and S&P.
Traders also reported that ever popular strategies that involve playing the relative value of single names in the corporate credit indices against the index were foiled as the indices traded tighter on the week. "Names included in the indices are typically cheaper to the index following the roll, but the index came right in line and threw that off," explained one. The investment grade series of CDX was trading at 34 bps on Wednesday.