who is attacking italy's bonds? , page-29

Hi there SaturnV

Banks tend not to own as many bonds as people think. A certain amount are held in their trading and investment books, but these inventories are small compared with the holdings in the funds management industry.(Nobody every talks about them! Think PIMCO!)

The incentive to trade Credit Default Swaps is much stronger:
1. They are much more liquid than bonds;
2. Swaps don't chew up balance sheet capacity; and
3. They require considerably less regulatory capital.

In the CDS market banks play a number of roles. Primarily the are price makers and intermediaries. They have huge volumes of transactions, but relatively small net risk.

So who is who in the Credit Default Swap market?

The net buyers* of CDSs will include hedge fund managers, banks trading books, commercial bank credit portfolio managers and investment bankers. (That could be three different departments in the same bank, using CDSs for three different reasons!)

The net sellers of CDSs will include insurance companies, fund managers (creators of synthetic debt) and other or the same bank trading books as you would find on the buy side, depending on their market view on any given day.

I don't think that you would be surprised by the names of the larger traders. JP Morgan is a world leader, and judging by their activities on Wednesday night, they a still a very agressive operator.

With the exception of the occasional and relatively rare, commodity linked note, Gold has little or no relevance to these Credit Markets. By comparison, turnover in the Gold market is tiny. A CDS price maker at Morgans or Citi's wouldn't look away form his newspaper while making a two way price in $100 million. (You might have to ask him for "half a yard" to get his attention.)


*The "buyer" of a CDS is the party that receives payment if the credit reference has a default event.