The price of credit-default swaps on General Motors Acceptance Corp. soared to around 280 basis points Thursday from 230bps at the start of the week after General Motors Corp. released fourth quarter results on Wednesday. In spite of Moody's Investors Service and Standard & Poor's holding General Motors on stable outlook, traders said there was a rush to buy protection from both speculative and institutional CDS players. "There's obviously a lot of panic in the market," said a trader at a German house.
One trader reported institutional fund managers were selling heavy volumes in the bond market and hedging remaining exposure by buying default swaps. A trader at a U.S. house said hedge funds were entering trades that play on General Motors' CDS being more volatile than other auto finance companies, such as Ford Motor Credit. JPMorgan pitched a trade to buy a five-year straddle on Ford Motor Credit and sell a five-year straddle on GMAC.
Moody's rates General Motors Corp. at Baa2 and Standard & Poor's has the name a step below at BBB minus, just one rung above investment grade. In a December analysis report, Moody's analyst Peter Doyle notes that although GM's earnings in 2005 are likely to remain low for a Baa2 rating, "Moody's anticipates that they will begin to improve during 2006."
