| Credit derivatives boost fixed income management |
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| 18/12/2005 | |
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Credit derivatives have become riskier over the past year, just as they tend to show up more frequently than ever before in fixed income funds. "Despite the low-yielding environment, investors are still reluctant to relax high performance targets. They expect their fixed-income funds to continue to outperform both benchmark indices and peer group averages", says Stéphanie Carillon, analyst at Standard & Poor's, the rating agency. In turn, managers now seek performance boosters on the riskiest markets. Those markets include credit and emerging bonds, as well as, to a lesser extent, credit derivatives and collateralized debt obligations (CDOs). "Some funds might consequently exhibit more risk than anticipated by investors", says Ms Carillon. This increasing presence of credit derivatives in fixed income funds could be occurring at a perilous time. According to Fitch Ratings, bankers and brokers are still overwhelmingly present on the global derivative market, which almost doubled in size in 2004 from $3 trillion to $5.4 trillion. "Although banks use the credit derivatives market to transfer risk, the top 15 global banks and broker dealers held 75% of gross sold and 81% of gross bought positions at year-end 2004. The market making function in relation to credit derivatives is therefore highly concentrated and market liquidity could be vulnerable should one or more of these institutions choose to withdraw from the markets or encounter a problem", says Ian Linnell, managing director at Fitch Ratings. Credit default swaps (CDS) have been the main engine of growth of the market. Banks, which are protection buyers, increased their positions by over 40% in 2004, bringing the value of their CDS under management to $427 billion. Their most important counterparts have been insurance companies, whose protection selling has shot up to $556 billion, an increase of 21% over the year. According to Fitch, the risk level of credit derivatives remains quite high particularly given the recent downgrades of Ford and GM. "The market also has to confront the issue of settlement risk following the occurrence of several high profile credit events and the significant increase in trading volumes", concludes Krishnan Ramadurai, senior director at the ratings agency. J.L. |
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Articles of the same Topic : Derivatives |
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