“Globally, CDS spreads tightened 7.4% last week after widening substantially the week before. Despite the CDS tightening, CDS IR downgrades outnumbered upgrades 4.5 to one, as four consecutive weeks of CDS widening resulted in 168 issuers establishing wider trading patterns. Although clearly calmed by EU and IMF bailout efforts, much uncertainty remains in the credit markets, thereby making continued volatility in CDS spread likely,” the rating agency says.
Equity markets continued to signal credit deterioration, with the five-year Probability of Default (PD) Index moving out across all sectors, another 3% on average.
Telecommunications, sovereigns, and financials saw the most CDS firming after having led the CDS widening over the past several weeks. Despite outperforming the broader market last week, all three sectors continue to price wide of historical trading levels.
The oil and gas industry lagged the CDS tightening last week. Credit protection on oil and gas companies is now pricing widest relative to historical trading patterns.
And technology underperformed across both the debt and equity markets, according the research.
More Sovereign Volatility To Come
“After tightening 17.5% last week on news of bailout funds pledged by the EU and IMF, CDS on European sovereigns resumed widening on Monday, 3.6% on average. On average, CDS on European sovereigns continue to price 22% wide of historical trading levels, indicating that much concern remains over existing debt levels and the countries’ ability to carry out necessary fiscal reforms. The table below highlights the 10 European sovereigns that underwent the most CDS widening on Monday, May 17. Despite undergoing tightening last week, CDS on Greece, Portugal, France, Belgium, and Spain continue to price well wide of their historical trading levels. Furthermore, CDS IRs for Portugal, Ireland, and Spain remain five to six notches below their Fitch agency ratings. The Czech Republic stands out as an outperformer, pricing tight of its established trading pattern and maintaining a CDS IR one notch above its Fitch agency rating,” the analysts writes.
“For each entity, the CDS IR, daily change in the CDS IR, relative differential, and the gap between its CDS IR and agency rating are included. Based on historical analysis, notch differentials between the CDS IR and agency rating are highly predictive of future rating agency actions,” they add.
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