Credit Swaps Tighten As Prop Desks Take Profits
Credit-default swap spreads tightened across the telecom, auto and industrial sectors late last week as proprietary trading desks started to take profits on default swaps they had bought in the last weeks. Five-year protection on DaimlerChrysler tightened 20 basis points to 160bps last week. Traders said investors were selling positions they had put on at the start of the month when the car manufacturer was trading around 145bps. Five-year protection on Ahold also tightened 20 basis points to 145-165bps by Thursday morning from midday on Wednesday, while Cable & Wireless tightened 60bps to 320-350bps.
The improvement in equities and positive sentiment caused desks to sell their default swap positions, traders said. Some of the trades were large blocks, such as a EUR30 million (USD29.05 million) sale of credit protection on Saint-Gobain early in the week by Commerzbank, which drove spreads on that credit in to 45-55bps from 65-80bps. Although the trade was not particularly large, under the prevailing conditions of volatility combined with thin volumes, a EUR30 million trade can move the markets, explained one trader. A spokesman at Commerzbank declined comment.
Spread tightening was aided by news of the International Monetary Fund's aid package to Brazil, another trader noted. Five-year credit protection on Telefonica tightened to 180-200bps Thursday morning from 235-260bps the previous day and protection on Banco Santander came in to 50-80bps from 91bps. "People got really short because of things happening in the stock market," said one trader, explaining what had happened in recent weeks leading up to the profit taking.