Carl Icahn's USD2.6 billion bid for the chunk of Lear Corp. he doesn't already control had investors piling into steepeners on the auto equipment supplier. A popular strategy saw the selling of one-year credit-default swaps on the name and buying 10-year CDS. The flows resulted in one-year CDS tightening seven basis points week over week to 75 basis points while at the long end of the curve, 10-year CDS widened 55 basis points to 435.
Prior to Icahn's announcement, the biggest spread difference between maturities was around 65 basis points between the two-year and one-year contracts. Post-Icahn, the steepest part of the curve was between the three- and four-year and the four- and five-year contracts. The curve was said to have twisted around the three-year mark, as the price of three-year contracts remained relatively unchanged while flattening and steepening occurred to either side.
"This curve movement reflects a possible leveraging event, rather than an imminent default, in which case the curve would have inverted," said Michael Taylor, credit analyst at Bear Stearns in New York. A credit trader added, "How much steeper this curve gets depends on how much leverage we hear about. It's wait and see with Icahn."
Across the board high-yield CDS tightened last week with all but 15 of the 125 names in the high-yield index moving in week over week. Traders pointed to the bid for new issue mezzanine CDOs as responsible for driving spread tightening.
"The structured bid for mezz CDOs has really picked up again. This and other technicals are driving the entire market. You've got stocks falling but spreads tightening right now," explained a credit trader.
