Liquidity in seven to 10-year credit-default swaps has picked up recently, with one dealer seeing long-dated protection being traded on a daily basis compared with only a few times a month earlier this year. Alex Reyfman, U.S. credit derivatives strategist at Goldman Sachs in New York, said interest in long-dated swaps is largely driven by real money-accounts wanting to match duration risk in their portfolios. Longer maturity default swap contracts offer credit spread hedgers greater sensitivity for the same level of instantaneous default risk relative to five-year contracts, he added.
The launch of a rival North American credit-default swap index, dubbed iBoxx CDS.NA.IG, to the TRAC-X index of 100 credit-default swaps is likely to further spur growth in long-dated contracts. Brad Poprik, co-head of North American structured credit trading at Deutsche Bank in New York, which is one of 11 dealers behind the index, noted that iBoxx has been designed to give end-users the flexibility to trade non-standard swaps, such as seven year contacts.
Sivan Mahadevan, head of credit derivatives and structured credit research at Morgan Stanley in New York, agreed that 10-year swaps appeal to traditional bond investors, who are used to buying 10-year maturities.
TRAC-X North America introduced 10-year contracts last week .
As liquidity in seven-10 year swaps continues to develop, some dealers hope that it to will encourage even longer-dated swaps, including 30-year contracts. As long as spread levels remain tight and the forward curve is attractive there will be great benefits for real money accounts to take on even longer exposures, said Reyfman.
