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Friday, March 29, 2024

And Now The Facts: German Regulator BaFin Sees "No Signs Of Massive CDS Speculation Against Greece"

Courtesy of Tyler Durden

Sorry, Merkel, Papanderou et al. BaFin finds that there is no sign that CDS speculation is involved when it comes to Greek government bonds, even as the volume in cash bonds has spiked. As a reminder – selling bonds has the same effect as buying CDS. And guess what: the real Greek cash-CDS basis is negative 112 bps (for “experts” this is swap-clean basis, i.e., Greek CDS minus German CDS compared to GGB minus Bunds). This means that cash bonds are far and ahead a leading indicator, and much more dominant when it comes to determining actual price/yield levels. So does this mean that GGB sellers will now be demonized with the same ferocity as those meddling CDS traders? Hopefully, this will finally be the end of the CDS as satan’s spawn topic.

From Dow Jones:

German market regulator BaFin said Monday that so far, it doesn’t see any sign of massive speculation in credit default swaps against Greek government bonds, despite some recent press reports suggesting this.

A significant reason behind widening CDS spreads is the increasing demand for insurance against Greek risk, BaFin said in a statement, adding that it closely watches the government bond and credit derivatives markets for selected euro-zone countries.

Credit default swaps are tradable, over-the-counter derivatives that function like a default insurance contract for debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller. Swap buyers may be protecting investments they own or simply making bearish bets against companies or countries.

BaFin said data published by the U.S. Depository Trust & Clearing Corporation don’t signal an increase in new open positions and don’t indicate massive speculation. It is true, however, that the gross volume of outstanding CDS contracts for Greek government bonds amount to around $83 billion as of Feb. 12, according to DTCC, more than twice the $41.1 billion a year earlier.

The gross volume of CDS contracts for Greece, which mirrors the trading turnover, has fallen again in recent days, BaFin said. The net volume of CDS contracts, meanwhile, is a better indicator for possible speculation, BaFin said, adding that the net volume of outstanding CDS contracts has been largely unchanged at around $9 billion since mid-January, according to DTCC data.

Greek CDS spreads and the yield premium investors demand on Greek government bonds over German bunds have been narrowing in the past few days, as the market has been relieved by Greece’s success in issuing EUR5 billion in a 10-year government bond last week. A further factor leading to spread tightening is French President Nicolas Sarkozy’s announcement Sunday that a number of European Union countries were preparing a support package for Greece, even though he said he doesn’t believe the Greek government will need financial help.

Greece’s five-year sovereign CDS spreads fell to 283 basis points by early Monday from Friday’s closing level of 301 basis points, according to CMA DataVision. That means the annual cost of insuring EUR10 million of Greek government debt against default for five years had fallen EUR18,000 since Friday to EUR283,000. This has been the first time since mid-January that Greece’s CDS, which hit a high of 425 basis points Feb. 4, has been under 300 basis points.

By Monday afternoon it narrowed further to 270/280 basis points, according to a market participant

ddd

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