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Debt traders miss credit default swaps as losses loom 

June 9, 2016

Joe Rennison and Mary Childs, Financial Times

Investors looking for protection from the next corporate bond market storm have all but lost the primary tool for mitigating losses.

Credit default swaps, prices for which rise and fall based on the perceived creditworthiness of the company they reference, can help insure a fixed-income portfolio from losses on bonds and loans.

Banks, which created and propelled the proliferation of CDS during the credit boom before the financial crisis, blame regulation for spurring the instrument’s dramatic fall from favour.

That leaves investors seeking alternative ways to protect their holdings of bonds and loans from sudden losses as the clock on company defaults ticks louder. In May, the 12-month trailing default rates for junk-rated bonds rose to 4.5 per cent, according to Fitch, the rating agency — the first time that pace has been above 4 per cent since July 2010.

Investors were reminded just how much they miss a liquid and functioning credit derivatives market during a torrid opening to the year. Read more

 
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