UK CDS Spreads Tighten Most in Q3 as Domestic Economic Policy Promotes Confidence Says S&P Capital IQ

Globally, spreads tightened 7% in Q3 with average spreads tighter for all regions, except Asia where they remained flat

UK CDS spreads experienced the biggest percentage tightening during Q3 2013, with the cost of protection tightening 33bps from 50bps, according to S&P Capital IQ’s latest quarterly Global Sovereign Debt Credit Risk Report.

Confidence was driven by domestic economic policy as the prospect of low interest rates and government lending schemes fuelled the housing market – a traditional growth driver in the UK.

Elsewhere, Egypt CDS spreads tightened nearly 100bps early in the quarter as the country’s army overthrew President Mursi and installed an interim Head of State. Although the region remains volatile, it still ended the quarter at 673bps, signifying a tightening of 24%. Furthermore, there were increasing signs of growth in China seeing spreads tighten 25% to 89bps.

Largest Percentage Sovereign Tighteners-Q3 2013

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Globally, spreads tightened 7% in Q3 with average spreads tighter for all regions, except Asia where they remained flat,” says Jav Bose, Head of Derivative Valuations at S&P Capital IQ. “The US once again dominated the news in Q3, firstly with the prospect of tapering – which never happened – in September and then the need to raise the debt ceiling to pay for ‘Obamacare’, leading to to an inverted CDS Curve for the US as protection buyers looked to hedge jump-to default risk.”

Based on the data, Argentina remains the most risky sovereign credit globally, despite it tightening over 17% over the quarter. Meanwhile, Ukraine slipped five places to be the second most risky sovereign credit as political and economic risks continue. The cost of protection in Portugal widened 24% to end Q3 at 485bps. However, all other Western European sovereign credits tightened.

Top 10 Most Risky Sovereign Credits – Q3 2013

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Norway, Sweden and Finland remain the top three least risky sovereign credits which all ended the quarter 2-3bps tighter. However, the US moved down five positions as CDS spreads widened to 35bps as technical default concerns lead to the purchase of protection in shorter maturities over one and two years. Australia entered the top 10 least risky sovereign credits as five year cumulative default risk dropped below 4%.

About S&P Capital IQ’s Global Sovereign Debt Credit Risk Report:

The Global Sovereign Debt Credit Risk report focuses on changes in the risk profile of sovereign debt issuers, with the intention of identifying key trends and drivers of change. The report uses data from S&P Capital IQ CDS to determine Q1 2013 rankings and commentary for:

▪ The world’s top ten most risky sovereign debt

▪ The world’s top ten least risky sovereign debt

▪ The largest percentage tighteners

▪ The largest percentage wideners

▪ Regional comparisons.

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