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Derivatives

Autos Tighten On Back Of Bond Demand

Credit default protection tightened on auto names last week on the back of increased demand for auto paper. "People feel that the auto sector is a safe place to put money," said a credit derivatives trader in New York, adding that auto paper offers relatively high returns for its credit rating. The most actively traded name was General Motors Acceptance Corp, a subsidiary of General Motors Corp. Traders in the U.S. said five-year credit default protection on GMAC came in five basis points from 66bps-71bps last week. A trader noted that while a number of corporates were buying protection, much of the action took place in the interbank market. Traders predicted GMAC will continue to tighten in the coming weeks, and could punch through the 60bps level. One trader estimated USD100-200 million of credit protection on GMAC was bought last week.

The tightening in GMAC default swap pricing was sparked by the recent defection of Robert Lutz, president of Chrysler, to GM, according to Mark Girolamo, corporate bond analyst at Deutsche Bank in New York. Lutz is a respected player in the automobile sector and bondholders welcomed the news of his move to GM.

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