Sovereign CDS Liquidity Converges for Developed and Emerging Markets

There is now almost as much uncertainty in the global credit default swap (CDS) market about the outlook for developed economies as there is for emerging economies, according to Fitch Solutions, a division of the Fitch Group, with average liquidity on developed economies’ sovereign CDS nearly matching that for emerging economies.

“While emerging economies’ average CDS liquidity has continued to fall back from its pre-Lehman bankruptcy highs, developed economy sovereign CDS has steadily increased and is now nearly as liquid due to market uncertainty over the impact of developed economies’ increasing budget deficits and falling tax revenues,” said Thomas Aubrey, managing director, Fitch Solutions, London.

“Of the developed economies, Japan has seen the biggest rise in CDS liquidity since the start of this year, moving from the 88th percentile to currently the 47th percentile of names with the most liquid CDS contracts across all asset classes. This has been due to market concern over the deterioration of Japan’s public finances,” Aubrey added.

More generally, the global CDS market became less liquid in the last two weeks with both the American and European CDS liquidity indices falling off from previous liquid highs at the end of October. Europe closed at 9.83 and the Americas at 10.19 as of 13 November. All sectors, including sovereigns, have shown falling liquidity with consumer services and telecoms driving the largest drop in liquidity over the last two weeks.

Sovereign CDS on Russia, South Africa and Mexico debt are still trading with the most liquidity, while in the Americas MGIC Investment Corp is the most liquid corporate name followed by Freescale Semiconductor, Radian Group and SLM Corporation (aka Sallie Mae). In Europe, Virgin Media Finance, followed by Kabel Deutschland, remains the most liquid European corporate name, with Hanson taking third place. Export-Import Bank of China is the most liquid corporate name in Asia, followed by Woori Bank and GS Caltex Corporation in third place.


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