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Derivatives

Japanese CDS Spreads Widen On Downgrades, Flurry Of Trades

The cost of 10-year sovereign Japan default protection surged roughly seven basis points wider to 60bps last week on the back of a string of downgrades by Moody's Investors Service and a subsequent flurry of trading activity. Among the more active players last week, Goldman Sachs turned heads after reportedly snapping up USD50 million in Japanese sovereign default swap protection, a transaction that is approximately five times the average size of a single trade. "You don't have to buy that much of Japan to make it move," said a trader in London. Another in Tokyo added that daily volume for the 10-year doubled to roughly USD100 million per day Tuesday and Wednesday.

Moody's downgraded eight of Japan's largest casualty insurers by two notches early last week, leading to speculation the sovereign may have to bail them out. The downgrade was a further blow to Japan's battered finances, along with its well-publicized banking-sector woes. "That was quite bearish for the Japanese sovereign. It chips away at their creditworthiness," said a trader at Goldman. He declined comment on the firm's trading activity last week.

The market uses 10-year default-swap spreads as a proxy on Japan, instead of the usual five-year tenor, because of the long-term problems the country faces, traders said. Ten-year protection has nearly tripled in the last year from 20bps.

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