Thursday, July 26, 2007

why CDS spreads are tight since 2004

--Synthetic demand is a large catalyst: technical factor, epspecially in the form of single-tranche CDOs --STCDO issuance repreents leveraged expoesure to the credit risk of an undelrying portfolio --dealers hedge their short credit risk expsure (buy protection) by selling protection in single-name secondary CDS market, so leverage magnify a small notional position in CDO into a larger market impact in CDS notional vol. --why CDO is in high demand since 2004 : because cash bonds spreads have compressed 85bps during 2003 while in 2004 CDS spreads actually widened, resulting in an increasing spread pickup in CDOs --

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