Several global 10-year synthetic collateralized debt obligations referencing Japanese credits have come to the market and are driving a pickup in credit-default swap activity. "We're seeing interest for consumer finance names such as Aiful Corp. and Takefuji Corp. and banks," said an official at Nikko Citigroup in Tokyo.
Although the default swaps in the portfolios are for 10-year trades, hedging has mainly been in the five-year space. "There's no liquidity further down the curve," noted one senior trader. While traders said significant basis risk exists for the positions, they noted such trades would actually benefit if spreads moved wider or the curve steepened, as issuers have been buying protection in Japan's chronically-tight CDS market.
