The price of protection on Russian sovereign debt jumped some 15 basis points after a clamp-down on money laundering forced a domestic bank to close its doors. Credit-default swaps were trading at 231bps the week before, which was the lowest point since April.
The price of credit default swaps referenced to the sovereign debt hit 245bps on Thursday morning, although the bid-offer spread remained tight at 241/247bps. This is much tighter than the bid-offer spread for corporate protection trading at similar prices and indicates the liquidity of the protection, noted traders.
"Every other emerging market credit similar to Russia is tightening right now," said one trader. The jump in price last week showed the market was taking the stories of domestic banks closing seriously, added the trader. The rise in the CDS price offered possibilities to yield-hungry investors, who were selling protection. Some hedge funds and bank prop desks were taking the other side and buying protection, according to traders.
The Russian Federation has a split rating, with Standard & Poor's rating it BB plus and Moody's Investors Service giving it an investment grade rating of Ba2. "There's concern in the market that the closure of one bank could signal further domestic bank problems," said Christian Stracke, head of emerging market research at Credit Sights in New York. This would be bad news for Russia's stability, because some economic theory links debt crises to corrupt banking systems, he added.
