March 6, 2009, 1:01 pm
How skittish are the debt markets these days?
Consider these data points from a recent analysts’ report: Michael Hartnett and Michael Penn of Bank of America Merrill Lynch are pointing out that credit default swaps on Berkshire Hathaway are trading at wider spreads than those covering Vietnam’s debt, and swaps on GE Capital, the finance arm of General Electric, are wider than those for Russia’s debt.
This state of affairs would seem to imply that investors see a bigger risk of default for debt of Berkshire, the holding company of Warren Buffett, one of the world’s most prominent investors, than for sovereign debt issued by Vietnam.
It also suggests a bigger risk for debt of GE Capital, part of a blue-chip conglomerate, than for the sovereign debt of Russia, whose credit history in recent decades is not exactly pristine.
It’s all the more remarkable because Berkshire’s and GE Capital’s debt both carry the highest rating of triple-A from Moody’s and Standard & Poor’s.
Credit default swaps offer the holder protection in case the underlying debt should default. So in theory, higher prices to buy default swaps would imply a bigger perceived risk of default.
But credit default swaps aren’t always a true gauge of the market’s risk perception.
For one thing, credit default swaps can be thinly traded, and therefore subject to exaggerated movements — or even manipulation. Keith Sherin, G.E.’s chief finance officer, suggested on CNBC this week that low trading volumes had affected the movements in G.E.’s credit default swaps.
For another thing, the buyers of credit default swaps aren’t always insuring against the debt. In some cases, for example, they may be hedging against declines in the related stock.
Tim Backshall, chief strategist at Credit Derivatives Research, suggested to Bloomberg News that this could be factor in Berkshire’s swap trading: Holders of the stock may be acquiring the swaps because it is easier than selling Berkshire’s stock short.Go to Article from CNBC.com »
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