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.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Stefan Isaacs

Job Title: Deputy CIO Public Fixed Income

Specialist Subjects: Bonds

Likes: Football, travel and the prospect of retirement

Heroes: Sir David Attenborough, Bill Shankly and Theodor Herzl

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