Swaps Soar on Germany’s ‘Act of Desperation’: Credit Markets - Bloomberg.com

Bloomberg:

Credit-default swaps soared on German Chancellor Angela Merkel’s move to ban speculation on European government bonds with the contracts, sparking concern among investors about increasing government regulation.

The Markit CDX North America Investment Grade Index Series 14 climbed 12.17 basis points to a mid-price of 120.67 basis points in New York, according to Markit Group Ltd. The increase in the index, which typically rises as investor confidence deteriorates, was the second-largest since March 2009.

Merkel’s coalition is increasing market regulation as German lawmakers prepare to debate a bill authorizing a $1 trillion bailout to backstop the euro. The unexpected ban, done independently of the European Union, came after the rescue package failed to stop the 16-nation common currency from weakening to a four-year low and as banks became increasingly reluctant to lend to one another.

“The market sees an inadequate policy such as this as an act of desperation and a refusal to address the fundamental problems at hand,” said Brian Yelvington, head of fixed-income strategy at Knight Libertas LLC in Greenwich, Connecticut.

Prohibiting speculation in the contracts, used to hedge against losses on corporate debt and bet on creditworthiness, may cause trading in swaps tied to Europe government bonds to freeze up, said Tim Backshall, the chief strategist at Credit Derivatives Research LLC in Walnut Creek, California. Trading limits may increase borrowing costs or limit the flow of capital, he said.

Posted via email from Jim Nichols