The price volatility of credit protection on General Motors Acceptance Corporation and Ford Motor Credit last week sparked trading of record volumes in index credit-default swaps. The price volatility reflected speculative trading around the auto pairs' first quarter results last week. Traders said market players turned to the more liquid index instruments as spreads on single names blew out before the results and made it less appealing to take positions that might be hard to unwind. One analyst at a German house estimated index trading volumes were four to five times their average for the week.
GMAC's results last Tuesday and Ford's on Wednesday were in line with expectations and the price of protection on the two names came in soon after. GMAC pulled in to 660 basis points on Wednesday, from a high of 680 bps at the end of the previous week. Ford Motor Credit mirrored GMAC's move, pulling in to 525 bps on Wednesday from 565 bps the previous Friday. The names settled tighter, explained the analyst, because speculative players closed out short positions when it became clear there were no shocks in the auto companies' results.
"The long-term risks remain in the autos sector, but the question is what will trigger the next protection price increase?" noted one trader. A downgrade by one of the ratings agencies would have this effect, he predicted. Moody's Investors Service rates GMAC Baa2 and Ford Motor Credit A3. Standard & Poor's has both GMAC and Ford Motor Credit at BBB minus, but gives GMAC a negative outlook.
