Five-year credit-default swap spreads on Lear Corp. tightened last week as better-than-expected earnings added momentum to a two-week rally. The price of protection dropped nearly 200 basis points from 765 bps April 10 to 550 bps Wednesday, pulling in 50 bps after the earnings release. "We've seen nothing but good news from [Lear Corp.]," said one New York trader.
Dealers noted protection selling has driven spreads tighter across the board, but Lear was most dramatic. "It's not like it's just been one day," a trader said. "It's been over two weeks, consistent rallying without even stopping for a breather." Hedge funds, prop desks, dealers, "anyone who's anyone," was selling protection on Lear last week. "Everyone's acting like it's a perfect world, like nothing bad is going to happen," said one trader. "It's kind of insane. The news cannot all be this good."
Richard Hilgert, director at Fitch Ratings in Chicago, said the news was good, but the agency maintains a negative outlook on Lear because of near-term operating and financing challenges. Lear's largest customers are General Motors Corp. and Ford Motor Corp., both of which are facing considerable challenges and continued market erosion. Citing other concerns such as rising raw material and gasoline costs, Fitch downgraded Lear four notches last month to B from BB plus.
Some credit traders, however, cautioned the good news may not last. "When everyone's going the same way, spreads will blow wider on the first tidbit of bad information," said one trader, noting the auto sector is especially sensitive. "But when the market's moving like this, you go against it at your own peril. It's a one-way train and no one wants to jump in front of it."