Swaps Trading Surges as National Deficits Rise

The net amount of credit-default swaps outstanding on 54 governments from Japan to Italy jumped 14.2 percent since Oct. 9, compared with 2.6 percent for all other contracts, according to Depository Trust & Clearing Corp. data. European countries led the jump, with the amount of protection on Portugal rising 23 percent, Spain 16 percent and Greece 5 percent.

Rising use of derivatives to insure against defaults or speculate on government bond prices is spilling over into the corporate debt market, stemming a rally that drove yields to the lowest relative to sovereign benchmarks since December 2007, according to BNP Paribas.

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of Treasuries held at 164 basis points, or 1.64 percentage points, yesterday, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The spread has widened from this year’s low of 160 basis points on Jan. 14.