Credit Default Swap Bull Market

[scriabinop23]

Quote from vergdb:

CDS is win-lose situation for both party, so no Bull or bear market for this product

Thats like saying ES futures are a win-lose situation for both party, thus ES is not in a bear market. Sure in zero sum terms you are correct, but ES is still reflective of the S&P, so if S&P is a bear, then ES by definition is the derivative of a bear, a bear. Same goes for these CDS positions.

(Am I misreading you?)

 

[scriabinop23]

Quote from sjfan:

99.9% of CDS are on corporates and sovereigns.... there are almost no real estate tied CDS (unless you count CDS on mortgage CDOs... which sort of exist, but not significant)

You just said the banks selling CDS on CDOs, ie AIG, likely brought it down. By real estate, I meant CDS contracts on CDO and agencies. Clarify?

 

[vergdb]

Quote from scriabinop23:

Thats like saying ES futures are a win-lose situation for both party, thus ES is not in a bear market. Sure in zero sum terms you are correct, but ES is still reflective of the S&P, so if S&P is a bear, then ES by definition is the derivative of a bear, a bear. Same goes for these CDS positions.

(Am I misreading you?)

No you are correct. however, the statement of saying CDS is in bull market right now is misleading. what if I'm long risk. I'd be losing money right now.

 

[scriabinop23]

Quote from vergdb:

No you are correct. however, the statement of saying CDS is in bull market right now is misleading. what if I'm long risk. I'd be losing money right now.

Yea the definition of 'long risk' is somewhat contradictory. Why is your definition of 'long risk' implied in betting that a credit spread will narrow?

Both sides are risky. And with "risk" spreads in the past historically at all times low, it makes sense that "risk" would increase. So "long risk" would be a bet that "risk spreads" (or credit spreads) increase. Thats my flawed logic for you as far as the language is concerned.

 

[vergdb]

Quote from scriabinop23:

Yea the definition of 'long risk' is somewhat contradictory. Why is your definition of 'long risk' implied in betting that a credit spread will narrow?

Both sides are risky. And with "risk" spreads in the past historically at all times low, it makes sense that "risk" would increase. So "long risk" would be a bet that "risk spreads" (or credit spreads) increase. Thats my flawed logic for you as far as the language is concerned.

I guess that's why I said there's no such thing as Bull or bear market in CDS. Does it mean that Spreads widening is that the product is making money for most people? no. its a give and take situation.

Why should you be long to risk when you think spreads will widen

 

[sjfan]

Quote from scriabinop23:

Yea the definition of 'long risk' is somewhat contradictory. Why is your definition of 'long risk' implied in betting that a credit spread will narrow?

The "risk" in CDS world refers to default risk, not spread risk. So when you are long risk, you are long default risk, which means you lose when the credit defaults, which means you are selling protection, which means you are harmed by spread widening. Makes sense?

 

[vergdb]

Quote from sjfan:

The "risk" in CDS world refers to default risk, not spread risk. So when you are long risk, you are long default risk, which means you lose when the credit defaults, which means you are selling protection, which means you are harmed by spread widening. Makes sense?

Yup it make sense when you don't isolate the risk of widening spreads and default. why should spreads widen if the curve is not getting riskier of defaulting?

 

[scriabinop23]

Quote from sjfan:

The "risk" in CDS world refers to default risk, not spread risk. So when you are long risk, you are long default risk, which means you lose when the credit defaults, which means you are selling protection, which means you are harmed by spread widening. Makes sense?

Got it on the "risk" now ... The definition of the risk 'language' is inconsistent at best, that is my point.

 

[vergdb]

Quote from scriabinop23:

Got it on the "risk" now ... The definition of the risk 'language' is inconsistent at best, that is my point.

Agreed

 

[sjfan]

Quote from scriabinop23:

Got it on the "risk" now ... The definition of the risk 'language' is inconsistent at best, that is my point.

Eh. It's a historical convention. You get used to it.

Though remember, default can be thought of an extreme spread widening.