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Derivatives

Steepeners Nudge Out Default, Single-Name Trades

Steepeners are taking off as credit players react to the curve change and get drawn away from default risk and single-name protection plays.

Steepeners are taking off as credit players react to the curve change and get drawn away from default risk and single-name protection plays.

Defaults in the auto parts sector--with Delphi as the poster child--led investors to buy short-dated protection to hedge specific default risk on single names across their portfolios. Now that credit deterioration induced by activity in the leveraged buyout market is driving the direction of spreads, players would rather put on five- to seven-year steepener trades. The most popular strategy is to sell protection at five years and buy protection at seven.

"For leveraged buyout names, people are looking at companies that have five-year revolvers in place and other specific capital structure issues," noted one flow trader. Understanding how much senior debt is in place is important to understanding how a company's bonds will react given an LBO bid.

Traders noted clients are increasingly asking them to point out single-name credit positions that were in-the-money but might "bleed away carry" in the current curve environment, traders said.

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