Credit default swap spreads on sovereign Japan continued to widen last week. Five-year credit default swaps traded early in the holiday-shortened week at 18 basis points, and 10-year credit default swaps at 27bps, up from 16bps and 24bps respectively in mid-January, said Sam Vulakh, managing director, credit derivatives at Bear Stearns in Tokyo. Credit default pricing on banking and corporate credits also continued to widen, he said.
Protection prices on Japanese credits have been rising over the past few months on the back of a plunging Nikkei, and fears that a slowdown in the U.S. economy could also hurt Japan, Vulakh noted. Credit default swap prices on U.S. and European credits have been rising steadily for some six months, and Japan is now starting to follow this trend to a lesser extent, he added. Credit default swap prices on Japanese credits have been unnaturally low for too long and the market is only now correcting itself to take this into account, he said. Japanese credits have been priced much more tightly than comparable U.S. credits, partly because of a lack of liquidity and a low interest-rate environment, he explained.
