Inflation Fears Prompt Spread Widening
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Derivatives

Inflation Fears Prompt Spread Widening

Credit-default swap spreads across corporate and emerging markets widened dramatically last week after a worse-than-expected U.S. inflation report led to new concerns about interest-rate tightening and triggered panic protection buying.

Credit-default swap spreads across corporate and emerging markets widened dramatically last week after a worse-than-expected U.S. inflation report led to new concerns about interest-rate tightening and triggered panic protection buying. "The whole market sucks," said one New York trader. "There's a lot of uncertainty right now, and the market hates uncertainty."

Even positive news failed to boost spreads last week. El Paso Corp. Wednesday placed USD500 million in equity to pay down debt. "It hasn't rallied," said one trader. "[Equity issuance] should have been good for credit, good for fundamentals, good for everything. [El Paso] should have outperformed the market, but it hasn't." Five-year CDS widened to 174 basis points Monday from 140 bps tights May 11. Spreads came in to 170 bps Wednesday, but traders and Ben Tsocanos, associate director at Standard & Poor's in New York, said they expected them to come in more. "It's pretty endemic," Tsocanos said. Names without news just gapped out.

The story was the same in emerging-market credit spreads. "We haven't seen this kind of widening in six to nine months," said one emerging-markets trader. Five-year CDS on Turkey widened 45 bps to 227 bps Wednesday, while Brazil widened 24 bps to 197 bps Wednesday from 173 bps Friday and 130 bps May 10. "Brazil got crushed this week," said one trader, noting its good fundamentals. "It's a strange market," said one trader. "No one wants any risk at all--long or short." Traders said CDS flows were mostly hedge funds, with real money instead focusing on new issues.

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