Spread betting

12 May 2006 By Taron Wade

Fears of a downturn in the bonds markets are not being reflected in credit spreads, which remain remarkably buoyant. Why? The answer lies in the growing demand for credit derivatives, used in structured debt products. These are keeping spreads artificially low.

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European bond spreads have widened in the period from the end of December 2005 to the beginning of May 2006, whereas credit derivatives spreads have tightened. According to research compiled by Barclays Capital, the five year bond spread on a basket of 130 European names widened from 26.8 to 28.2 basis points while credit default swaps (CDS) on the same names tightened from 30.4 to 25 basis points.

The asset swap spread – which measures the difference between the CDS and cash spreads – has fallen from 3.62 basis points on December 27 to 3.19 basis points in May.

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