The price of protection across the board widened last week as hedge funds and prop desks put on cross-curve steepeners and other bearish trades. Spreads have been widening steadily for the past few weeks and New York traders said protection buying has been both the cause and effect. "That's the only theme," said one. "The market is weak. People are feeling vulnerable and there's no appetite for risk."
Wednesday's announcement of higher-than-expected U.S. inflation figures boosted equity markets, which had been cited for taking credit markets down. But it also boosted concerns about continued interest rate hikes, driving spreads still wider. "The stock market was leading the day, but it's not anymore," said one trader Wednesday. "People are still negative toward credit risk."
For example, five-year credit-default swap spreads on Abitibi Consolidated, a Canadian paper producer, blew out to 495 basis points Wednesday from 435 bps Monday. That was the biggest move of the week, and deterioration of the Canadian dollar contributed to it. But traders noted it was also an example of the general trend. "All the cross-over names--except the autos--are at all-time wides," said one trader.
On the other hand, five-year CDS on Ford Motor Co. and General Motors Acceptance Corp. each tightened about 20 basis points last week from, respectively, 875 basis points June 7 to 855 bps Wednesday and 305 bps to 280 bps over the same period. General Motors Corp. started trading on a running basis for the first time in months and tightened to 925 basis points Wednesday. Traders attributed the tightening in auto names to a labor union agreement over parts manufacturer Delphi.
