Australian credit derivatives trading volumes have fallen by around a third in recent months as spreads have come in but have still not attracted protection buyers. "It's almost becoming another Japan," said one credit trader at a European house. As in Japan the lack of protection buyers, such as local banks, could make it a one-sided market and hurt volumes even more.
The demand for structures such as CDOs in which investors sell credit protection far outweighs the number of protection buyers. "[Foreign firm's have] been using Australian credits for diversity," said Greg Wakelin, credit derivatives trader at ANZ in Sydney.
Wakelin said the overall market has tightened by an average of seven basis points in the last few weeks, coupled with chronic tightening for the majority of the year. For instance, five-year protection on Qantas Airways has come in to 81bps from 89bps since last month. Glen Hodgeman, head of Australian dollar credit trading at Citigroup in Sydney, concurred, "Credits are at all-time tight levels."
