Credit Derivatives to Approach $40 Trillion in 2008

Credit default swaps (CDS) , originally conceived by banks over a decade ago to enable the transfer of credit risk are set to approach $40 trillion in size by the end of 2008 according to Deutsche Bank’s credit strategist John Tierney. Trading in indexes based on credit-default swaps and other variations of derivatives that allow investors to speculate on the ability of companies to repay their debt, will drive the increase.

Credit-default swaps, more than doubled to $26 trillion in the first half of 2006 from a year ago, according to the International Swaps and Derivatives Association. CDS remains one of the fastest-growing investment vehicles partly because they offer a cheaper and easier way to take a view on the direction of corporate bonds.

The growth in the market is set to be supported by demand from funds like our M&G Optimal Income fund which has the ability to invest in CDS in order to take both positive and negative views on a company’s creditworthiness.