Fitch Solutions: Global CDS Liquidity Reaches New High

NEW YORK & LONDON - 24 August 2011

Fitch Solutions, a division of the Fitch Group, says that in the month to 19 August, increased CDS market uncertainty on the prospects for sovereigns has pushed average global CDS liquidity to its highest level since Fitch Solutions' liquidity scores time series began in March 2006.

"CDS referencing developed market sovereigns have seen the biggest liquidity surge, followed by emerging market sovereigns, with average CDS on both now trading at near similar levels of liquidity," said Diana Allmendinger, Director, Fitch Solutions, New York.

"This near convergence between developed and emerging market sovereign CDS liquidity was last seen during the start of this year, and appears to signal renewed CDS market uncertainty on the potential for Euro-zone contagion as well as slower global growth," added Allmendinger.

As of last Friday's market close, average CDS liquidity for emerging and developed market sovereigns was 8.12 and 8.26 respectively, compared to 8.21 and 8.45 one month previously (the lower the score the higher the CDS liquidity). Average global CDS liquidity closed at 9.30 versus 9.34 for the same period.

The full Fitch Solutions' Global CDS liquidity scores commentary, which covers the top five most liquid CDS corporate names in Europe, North America and Asia, as well as the top five most liquid global sovereigns.

In general, the liquidity of a credit derivative asset increases when it is showing signs of financial stress in combination with a significant amount of debt outstanding and/or changes in its capital structure, including new issuance. The liquidity scores of assets have historically traded between 4 at the most liquid end, through to 29 at the least liquid end. Entities also tend to be more liquid when there is agreement about present value but disagreement about future value due to heightened uncertainty surrounding the entity.
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