Spreads on European single-name default swaps have narrowed substantially this month, as synthetic collateralized debt obligations structurers bought protection to take advantage of wide spreads and the usual year-end rush to finish deals was larger than expected, according to several traders.
Traders estimated five-year protection on most names has come in by around 40 basis points. "Cash is very cheap right now so spreads were going to tighten anyway, but the CDO bid has really pushed them in," said one trader. Although traders said last week was relatively quiet given the Thanksgiving holiday, they noted the previous week experienced an across-the-board tightening of at least 10%. Some names, such as Volvo and DaimlerChrysler, tightened even more dramatically, with five-year protection on Volvo shrinking from around 125 basis points the previous Friday to roughly 95bps by last Tuesday. DaimlerChrysler tightened a similar amount to 145bps. Volvo is considered particularly attractive given its A3 rating fromMoody's Investors Service and DCX is liked because it is one of the most liquid European names.
Roger Harvey, a credit derivatives analyst at J.P. Morgan in London, said, "it was a very busy week."
