The total market cap of outstanding credit derivative instruments is estimated to be over 30 trillion dollars. Credit default swaps are a substantial part of this market, though it is not totally clear how to measure the market cap of CDS, as when the CDS is initially issued no money are changing hands, the protection seller just signs his electronic name on the contract.

This is why watching CDS is extremely important and gives timely warnings. This is our favorite residential mortgage ABX.HE index:

ABX.HE

We are well below February panic levels. Then corporate CDS – CDX.NA:

CDX.NA

And finally commercial real estate CMBX-NA:

CMBX-NA

The last week losses are pretty substantial. For example, ABX-HE-A 07-1 lost about 600 bp in one week, while the coupon is 64bp. It means about 9 years of income are lost in 5 days. Of course, the magnitude and speed of the collapse is less than the February panic, but absolute levels where CDO are traded now are impossibly low.

Advertisements