Credit Default Stress

From Reuters:

April 15

The cost of insuring against a default by Greece and Ireland rose on Friday on growing speculation Greece will eventually have to restructure its debt and after Moody's downgraded Ireland to the brink of "junk" status.

The cost of insuring against a Greek default rose 15 basis points to 1105 bps, meaning it costs 1.1 million euros to ensure 10 million euros of debt against default, according to Markit.

Irish five-year CDS prices rose 10 bps to 555 bps.

April 21

The cost of insuring Greek government debt against default hit a new high on Thursday, extending a rise rise fuelled by talk of a possible restructuring.

Greek five-year credit default swaps rose as high as 1,335 basis points, up 53 bps on the day. Irish CDS rose 20 bps to 635 bps, while Portuguese CDS were up 17 bps to 650 bps.

EURO GOVT-Portuguese yields soar ahead of Easter break

Yields on Portuguese and Irish government bonds soared on Thursday as markets scaled back exposure to sovereign risk ahead of the long Easter weekend even while stocks rallied on strong corporate results.

Worries over a possible Greek debt restructuring were expected to keep pressure on rattled peripheral bond markets into next week, resulting in yields -- already at euro lifetime highs -- continuing to push higher.

Given the extreme levels already offered on Greek debt, with two-year yields at more than 23 percent, Portuguese and Irish bonds bore the brunt of market uncertainty.

Ten-year Portuguese bond yields PT10YT=TWEB rose above 10 percent for the first time since the launch of the euro, while two-year bond yields PT2YT=TWEB climbed by more than 100 basis points to 11.978 percent. Shorter-dated Irish yields rose by around 85 basis points <#IEBMK=> while two-year Greek yields were up by around 25 bps.

Almost 85 percent of participants in a Reuters poll said Greece will have to restructure its debt, despite firm denials from Athens, although more than half said it would be at least a year before Greece acted. [ID:nN20173569] [ID:nLDE73J0J0]

Five-year Greek CDS prices show a 70 percent probability of default, based on a 43 percent recovery rate, according to Reuters calculations from Markit data.

Spanish 10-year debt outperformed after a successful bond sale on Wednesday eased fears of contagion, with yields falling for a third session.


The sovereign debt market is rapidly approaching the boiling point in some peripheral Euro countries. As we have mentioned before in previous posts - watch Credit Default Swaps - they are a good indicator of stress level in the bond market. From these latest results it appears we are approaching a breaking point. The coming week should produce some substantial market gyrations and fallout, in my view.