Fitch Solutions: CDS Market Concerns Ease for Developed Economy Sovereigns

London and New York - 11 March 2010

Fitch Solutions, a division of the Fitch Group, says CDS market concerns on the prospects for developed market sovereigns have eased in the past two weeks, mainly driven by the announcement of Greece's revised austerity package on 3 March.

“There appear to be diverging views on the future prospects for the Oil and Gas sector among CDS market participants”
Fitch's developed market sovereign CDS liquidity index fell from 8.39 to 8.55 during the period 23 February to 5 March (the lower the liquidity score the greater the CDS liquidity), whilst in the past week sovereign spreads have led overall market improvements - tightening 8.4% on average and being mainly driven by European sovereigns, which tightened 13%.

"The positive market reaction to Greece's revised austerity plan has meant CDS liquidity for developed market sovereigns appears to be diverging again from emerging market sovereigns, bucking the convergence anomaly witnessed during much of 2009 and early 2010," said Jonathan Di Giambattista, Managing Director, Fitch Solutions, New York.

Elsewhere, companies in the global Oil and Gas sector have now overtaken the Telecommunications sector as trading with the most liquidity on average. Among all sectors, Oil and Gas CDS spreads continue to price tightest relative to historical levels, despite recently underperforming the broader market.

"There appear to be diverging views on the future prospects for the Oil and Gas sector among CDS market participants," said Di Giambattista. "Beyond speculation on future commodity prices, an increase in M&A activity may result in additional leverage, whilst in North America the possible future elimination of tax incentives for oil and gas producers may also be weighing on market sentiment towards the sector," Di Giambattista added.

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, is available on the agency's website under -"Fitch Solutions' Global Liquidity Scores Commentary Issue 29".

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.

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development