Derivs - Credit

Emerging markets experienced a tumultuous week as investors looked to shed risk in the face of rising U.S. Treasury yields and a lacklustre policy response from Japan.

Hedge funds are buying five-year credit default swaps on emerging market corporates, credit indices and sovereigns, with the latter sector experiencing the bulk of trading. The trades are driven by expected deterioration in emerging market names in the near term.

Investors should look to receive euro 1y1y overnight index swaps as a cheaper and more conservative interest rates strategy, according to the Royal Bank of Scotland.

Credit Suisse is suggesting investors receive 5y5y Canadian dollar swaps against 5y5y U.S. dollar swaps with beta-adjusted risk weightings.

Barclays has cleared the first single-name credit default swap client transactions for buyside clients. The transactions were for Citadel and MKP Capital Management.

Tradeweb has revealed it completed its first electronic buyside pre-trade credit check for swaps ahead of the introduction of mandatory clearing for swap and derivatives for category two entities under Dodd Frank today.

Investors are being told to buy payer spreads on the iTraxx Main to hedge for widening spreads in a risk-off environment. The widening of spreads on the iTraxx Main began in May, following historically low levels of market volatility on all asset classes. Volatilities remain low despite this change, giving investors scope to hedge now for summer widening.

Private banks in Asia Pacific are showing less appetite for hybrid structured products that mix fixed income underlyings with equity, commodity or fx assets, with other specialized investors, such as hedge funds, instead driving the trend.

The International Swaps and Derivatives Association has published a new 2013 standard credit support annex to standardize market practices in collateral management for over-the-counter derivatives.

Hedge funds are buying structures that allow them to position for increased U.S. interest rates and currency appreciation simultaneously.

Credit default swaps have gained popularity in Latin America following the debt default of Ecuador in December 2008 and CEMEX, the Mexican building materials and cement supplier, in October 2009.

Stephen O’Connor has left his position as managing director at Morgan Stanley to take up the position of full-time chairman at the International Swaps and Derivatives Association.