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In April 2012, we introduced a comprehensive suite of trading
and risk management signals designed specifically around the credit
default swap (CDS) market. Our CDS factor suite opens up unique and
insightful opportunities for systematic approaches to CDS
evaluation. The indicators range from metrics built using standard
financial ratios to fair value estimates, equity analyst estimates
and cross-asset insights. In this report, we review factor
performance since the inception of this suite, with additional
attention to extreme movement during the recent COVID-19-induced
market volatility.
US: Since the CDS factor suite went live, Price Momentum
measures were the most consistent outperformers, particularly those
capturing short-term changes in probability of default, led by
5-day Change in Probability of Default (Tenor=5Y) among investment
grade CDS and 4-week Industry Relative Return for high yield
CDS
Europe: Beyond strong performance from short-term Price
Momentum factors, Value Divergence, a proprietary cross-asset
measure capturing the level of divergence between the equity and
CDS markets, posted positive spreads in 66% of months
Asia Pacific: While Probability of Default (Tenor=5Y) was the
top long-term performer, recent Street Revision Magnitude
performance suggests that CDS traders temporarily turned to analyst
outlook in droves during the extreme market volatility in March
2020, behavior more consistent with the first half of the analysis
period
March 2020 exposures to 1-month Change in Probability of
Default (Tenor=5Y) captured notable increasing probability of
default in the Energy sector in North America for both investment
grade and high yield CDS, while Basic Materials also weakened in
Europe and Industrials improved in Asia Pacific
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.