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CREDIT COMMENTARY
Oct 17, 2013
CDS unmoved amid debt deal
Global financial markets heaved a sigh of relief today, following yesterday's last minute passing of the US debt ceiling bill by Congress.
Credit markets had felt the pressure of the US government shutdown from October 1st as credit spreads widened across the board up until yesterday, when reports circulated that Congress was close to agreeing a deal to raise the existing debt limit.
The Markit CDX North America Investment Grade index had reached 85.5bps on October 8th, widening 4.6bps since the shutdown. It closed at 73.64bps yesterday, which is 6.2bps tighter than where it traded before the shutdown.
The passing of the bill by Congress ended global fears of a possible US default by agreeing to lift the current debt ceiling of $16.7 trillion. US CDS on the 5-year maturity traded 3bps tighter at 33.8bps early in the US session today.
This is a relatively large movement for credit trading at such low levels. However, the risk profile of the US has certainly changed dramatically over the 16-day period.
Typically, the difference between the 5-year and 1-year maturity of US CDS has been positive with the 5-year trading wider.
Since the government shutdown, this relationship has switched such that the 1-year CDS is currently trading wider. The US CDS curve now has a downward sloping shape, which is typical for distressed credits.
With the re-opening of the US government, credit markets spent the rest of the day focusing on earnings. In fact, markets had already priced in a possible agreement on the debt ceiling discussion into CDS spreads last week.
Goldman Sachs was under the spotlight as revenues dropped 20%. The US bank's CDS spreads were barely responsive to the news while they widened only 0.5bps to trade at 122bps - a strong indication of it having a solid credit profile.
IBM also failed to impress as its total revenue shrank 4% compared with the same period last year. IBM's spreads were more receptive with a 2.6bps tightening to trade at 36.5bps.
Akif Ince, Credit Analyst, Markit
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