Greece’s CDS levels traded above Greek-German bond spreads before the spreads soared, suggesting that some market participants simply had to buy protection, almost at any price. We saw the same phenomenon in Portuguese CDS-bond basis.
It is also worth noting that the Greek and Portuguese CDS levels fell below bond spreads before the spreads narrowed in H1 last year, i.e. credit default swaps were leading the bond market performance. We would also note that the Portugal CDS spread is still wider than the bond spread, suggesting that the sell-off in Portuguese bonds will continue.
Click on charts to enlarge, courtesy of Nordea Markets.
Enjoy, while the Spain is a serious country ... Be careful!
Read more about the sovereign credit in "Q&A: Carmen Reinhart on Greece, U.S. Debt and Other ‘Scary Scenarios’" at WSJ Real Time Economics!