Traded volumes of credit-default swaps referenced to Enron's financial backers J.P. Morgan Chase and Citigroup increased five fold on Thursday amid concerns that Enron was going to file for bankruptcy. The activity picked up after the two firms announced their decision to invest an additional USD500 million between them in the company that would be created were Enron and Dynegy to merge. They have already invested USD1 billion. Officials at the firms confirmed the investments.
Over the past week New York-based traders reported credit-default swaps spreads on both financial institutions have widened 5-10 basis points over a three-day period. Gordon Boozer, associate in credit derivatives trading at Swiss Re in New York, said trading volume has increased from one or two trades a week to one or two trades a day. "Volume is starting to pick up. We're starting to see more activity," he added.
Spreads on Citigroup have blown out from about 5-10bps over the last three days to 30-40bps on Thursday. J.P. Morgan has widened from 35bps to 40-50bps. Traders contend that it is just the beginning for the firms and predict that spreads could widen as much as 30-50bps as the market continues to fine tune its focus on the struggling energy company.
