Global CDS Liquidity Rises on Strength of Recovery Concerns

Global credit default swap (CDS) liquidity continued to rise in the past two weeks as market uncertainty about the overall strength of the global economic recovery persists, according to Fitch Solutions.

“The industrials and consumer goods sectors have seen notable rises in liquidity as industry support schemes such as cash for clunkers are being wound down, thereby increasing uncertainty about the sustainability of future demand,” said Thomas Aubrey, managing director, Fitch Solutions.

Global CDS liquidity peaked at 10.40 on 8 October versus a high of 10.42 for the previous two-week period. Europe still remains more liquid than the Americas, with Fitch’s European CDS liquidity index closing at 9.75 and the Americas at 9.98, as of 16 October.

In general, the liquidity of a credit derivative asset increases when it is showing signs of financial stress in combination with a significant amount of debt outstanding and/or changes in its capital structure, including new issuance. The liquidity scores of assets have historically traded between 4 at the most liquid end, through to 29 at the least liquid end. Entities also tend to be more liquid when there is agreement about present value but disagreement about future value due to heightened uncertainty surrounding the entity.

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