GE widening poses limited correlation impact, says JP Morgan

In its latest High grade credit strategy research report, JP Morgan says that the recent deterioration in GE spreads will have a limited impact on dealer correlation desk activity. It says that GE is included as a reference entity in 65% of CSOs and GE bonds are used as funding collateral in 5-10% of deals.

The report points out that increased credit risk of GE would lead dealers to hedge themselves by selling more protection on the name to hedge the name in reference portfolios. However, to hedge the credit risk in the collateral, they would need to buy protection.

The researchers say that GE and GECC bond spreads of 525 basis points and 650bp respectively are hard to justify. The credit default swap curve implies a 23% risk of default in one year and 51% in five years. Given the company's liquidity position, the report notes, this seems overdone.