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Credit Default Swaps

The 5 things that bond investors have learnt from the Greek default

1. The price charged by central banks for saving the world is seniority. The ECB did not take haircuts on the Greek debt it had bought as part of its SMP bond buying programme. Did you spot the clause in your bond documents that said that you were buying the subordinate tranche of the government bond market? Of course it never existed – in extremis, which is exactly where we are – the law is to…

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If sovereign CDS is no longer an effective hedge then who’s in trouble?

Current plans are for Greek restructuring to be ‘voluntary’, which means that it would fail to trigger CDS (see here).  CDS is supposed to be the cost of insuring against default.  If Greek restructuring fails to trigger CDS, then CDS would lose its credibility as an effective hedging instrument against sovereign default.  Such actions would  have absolutely huge implications as all the banks w…

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Mummies’ boys – the number 1 variable for predicting Eurozone sovereign stress?!

I was reminded today of the tongue-in-cheek chart that we put on this blog a year ago showing the close correlation between sovereign 5 year CDS (i.e. the cost of insuring governments against default) and the percentage of men aged 25-34 who still live with their parents within the Eurozone founder member countries (credit to JP Morgan).  This was a prompt to do an update, and the outperformanc…

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The economy continues to lead credit

Two months ago I questioned whether the decoupling between credit spreads and economic fundamentals could continue for much longer. I felt at the time that at some stage the weakening economic data would start to drag credit spreads wider, at least relative to government bonds. I also asked whether we might enter an environment in which high quality investment grade credit could see a flight to…

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Who owns sovereign credit default swaps and why it matters

Guest contributor – Tamara Burnell (Head of Financial Institutions/Sovereign Research, M&G Credit Analysis team)

The Bank for International Settlements (BIS) recently released some fascinating data on the country risk exposure of global banks. For the first time we got some insight into not only which banks own Greek and other peripheral European sovereign, bank and corporate debt, but also who…

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UK inflation shocking?

UK CPI inflation jumped from 4.0% to 4.5%, versus expectations of only a slight increase to 4.1%.  Core CPI, which strips out food and energy prices, soared from 3.2% to 3.7% and is now at easily a record high (data goes back to 1997).  One bank called the inflation numbers shocking, arguing other economies aren’t seeing anything like this surge in core inflation, UK monetary policy is too loos…

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So we’re all being financially repressed in the developed world – but does that really mean poor bond returns? (+ competition time)

I attended an interesting lecture last year by Carmen Reinhart (hosted by RBC) where she predicted an era of negative real returns for investors in developed market sovereign bonds.  This was due to what she termed ‘financial repression’, as the authorities in richer countries struggle with the huge debt burden.  Financial repression is loosely taken to be things such as greater financial regul…

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European sovereign debt fears – limited impact on European corporate bond markets

Strong earnings results, low inflation expectations and a view that the ECB will have to keep interest rates lower for longer to support the economic recovery has seen demand for European corporate bonds remain fairly robust.

That is not to say that European corporate bond markets have been unaffected. Those credits that have been most impacted by the sovereign debt worries have unsurprisingly …

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If it’s Wednesday, it must be…Spain. Tail wags dog.

Following the downgrades of Greece (to junk) and Portugal (to A-) on Tuesday, S&P looked upon the carnage in sovereign bond markets that ensued and decided that on Wednesday it would be Spain’s turn.  Spain’s sovereign credit rating was cut from AA+ to AA, just a notch, but enough to send its CDS spread up above 200 bps, and to see the credit spreads on its banks widen by 20 bps or more for sen…

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Speculative thoughts

Democratic governments are designed and exist to promote and protect the interests of their population. Thus they tend to be described as “good”. Capitalists are seen to be out for themselves and therefore acting in their own selfish interests. They are often described as “bad”. However, in order to have a prosperous society one has to combine the socialism and fairness of democracy with the ef…

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