CDS spreads widen, but link to ETF shorting weak, Data Explorers says

Insurance against defaults has once again got more expensive in Europe, as CDS spreads have widened, according to data from Markit.

The Markit iTraxx Europe hit 180.5bps yesterday, its widest level since December, while the the Markit iTraxx Senior Financials is closing in on the 300bps level, the data provider said.

Driving the widening spreads are politically linked fears, including the recent Greek election and the news that depositors are withdrawing money from the country’s banks – about €700m daily.

And the contagion threat is also widening spreads on paper issued by the EU core countries too; Germany’s CDS broke the 100bps level for the first time since January, said Markit credit expert, Gavan Nolan. Spain and Italy are under renewed pressure.

The link to short selling of European exchange traded products is less certain, however, according to Data Explorers. It said that because European ETFs are fragmented across multiple exchanges, providers and currencies, it tends to find US names topping the list of securities most in demand by those who want to borrow them in the hope that their prices will fall. Currently, US financial and energy related ETFs dominate the list of most shorted ETFs, with investors also borrowing Russian and emerging market ETFs.

The impact on individual equities of the CDS spreads is even more tenuous. Europe’s results season is pushing up borrowing levels in any case, Data Explorers suggests.

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