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February 10, 2014

Bank withdrawal drives investors from corporates to CDS indexes | FT article

Banks' withdrawal from principal market making is in turn driving investors from corporate bonds to CDS indices to trade or hedge credits

Banks' withdrawal from principal market making is in turn driving investors from corporate bonds and single name CDS to CDS indices to trade or hedge credits, according to this FT article (subs. required).

The shift in traffic based on liquidity concerns is shown by US and European indexes rising significantly in price given burgeoning demand whilst corporate bond prices stayed nearly flat – despite indexes being less targeted to a single credit than single names or single bonds. The article's final point is that this is no silver bullet and direct liquidity solutions are needed which I take to refer e.g. to agency execution, order driven markets.  

Needing mitigation in the short term for Basel III toughening capital ratios, banks are evidently not waiting patiently for these solutions to emerge.


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