Protection selling by dealers looking to tidy books in the New Year drove trading in the credit-default swap market last week. Trading was haphazard and still gaining momentum after the holidays, according to officials, with little single-name interest from participants. "People are getting back into the swing of things," said one official. "There is no great directional sense yet."
One trader noted the price of protection on a group of European corporates connected with financing actions tightened marginally last week, as dealers hedged short credit positions. Five-year credit-default swap spreads drew in on Dutch telecom provider Royal KPN, to 81bps from 86bps last week, and on U.K. food service company Compass Group, to 118bps from 126bps in December. Equity in both companies was recently put up for sale.
Five-year credit spreads in the U.S. auto sector also tightened, despite sales figures showing sharp declines from the same period last year. One trader attributed this to dealers offsetting long General Motors Acceptance Corp. and Ford Motor Co. positions by selling protection. GMAC closed in 40bps, to 425bps on Wednesday from 463bps on Tuesday, and Ford tightened 23bps, to 969bps from 992bps, over the same period.
One analyst at a U.K. firm attributed protection selling activity to dealers unwinding short credit positions entered into late last year. "They proved to be more expensive than first thought," he said. "It has been a bullish start to trading."