Bank of America publishes 2009 outlook on credit derivatives

Less than a week away from the end of 2008, Bank of America released its 2009 outlook on credit derivatives. Firstly, analysts expect the credit default swap market to resemble that of bonds in 2009. Single-name CDS will use fixed coupons - either a 100-basis point coupon (for tight credits) or a 500-bp coupon (for wider credits). It is anticipated that the difference between the fixed coupon and the CDS spread will be exchanged upfront, making the CDS very similar to a bond with a fixed coupon trading at a premium or a discount.

Secondly, analysts argue that the North American CDS market will drop modified restructuring as a credit event in early 2009 due to the CDS market's uncertainty regarding cash settlements of modified restructuring credit events. Only trades on North American-based investment grade reference entities will be affected, as European-based credits will still have modified-modified restructuring.

Finally, in addition to the Clearing Corporation beginning its operation as a central CDS clearing house in early 2009, Bank of America also anticipates CDS to trade at substantially rich levels to cash.