Reuters: Credit Default Spreads May Continue to Tighten
Reuters reports in this U.S. Credit markets column that “Corporate credit spreads in the derivatives market narrowed in the first quarter, defying many predictions, and analysts on Thursday said the march tighter may continue for a while longer.” The article continues with these additional quotes:
Technical factors, including demand for structured products, likely fueled the broad tightening trend the most, analysts said. A broadening of participation in the credit defaults market also may have contributed to the narrowing, some analysts said.
"Demand for structured credit derivative products was an overriding theme of the first quarter in the credit markets, creating technical support for single-name credit default swaps as well as corporate bonds," said Mike Mutti, a managing director and credit strategist at Bear Stearns in New York. Collateralized debt obligations frequently use credit default swaps, which can be created by dealers, rather than cash bonds that have a set supply based on how many the company has outstanding. The long-standing global reach for yield by money managers likely also played a role in the general first-quarter tightening of CDS spreads, some analysts said.
The global hunt for investment return is truly impressive. TCM wonders how much longer this tightening can continue. Surely the risks are increasing relative to a given unit of investment return in the credit derivative sector, and at some point one needs to exit such investments. However, the cost of relative under-performance is quite high when one sits in cash waiting for that proverbial market price correction. The interesting question with the credit derivative sector is just how much liquidity will be available when the market starts declining. Will it be like May 2005?