American credit market outlook

Average investment-grade credit default swap spreads on Friday traded at their tightest levels since the creation of the benchmark credit derivatives index three years ago as investors closed out short positions ahead of the index's roll on Monday.
Investors are likely selling protection and unwinding short positions, said John Tierney, head of credit strategy and credit derivatives research at Deutsche Bank in New York.
"A lot of what is going on right now is roll-related," he said.
The benchmark Dow Jones investment-grade index of 125 names held at 39 basis points on Friday after closing at its all-time tightest level on Thursday.
"A lot of people are using this index to hedge other portfolios," said Ira Jersey, US credit strategist at Credit Suisse in New York. Selling out of these positions to move into the new index is driving spreads tighter, he said.
The index rolls every six months and four credits will be substituted in the new investment-grade index, its sixth incarnation.
The roll, however, is expected to be benign compared to the last one in September, when General Motors Corp and Ford Motor Co's finance units dropped out of the index following their downgrade to junk status.
Series four of the index, which includes General Motors Acceptance Corp and Ford Motor Credit Co, is still actively traded by investors wanting to take views on the auto sector.
As the constituents of the new index is broadly similar to those of the current series 5, however, analysts expect most investors to move positions on series 5 into series 6.
While credit spreads overall have remained tight on high cash reserves chasing the assets, credit derivative indexes have outperformed those of bonds, largely due to technical reasons.
The difference between Credit Suisse's Liquid US Corporate Index of bonds and the Dow Jones investment-grade credit derivatives index has narrowed to 10 basis points from 14.5 basis points at the beginning of the year.
The crossover credit derivative index, meanwhile, widened marginally on Friday due to pressure on GMAC after GM said it would restate its income, raising some concerns a GMAC sale may be impeded. However, it remained 15 basis points tighter on the week.
"It's interesting that even with GM news, the tights show how technical the market is," said a trader.