Trading in credit derivatives increased 113% in 2006 to $49.9 trillion worldwide, according to a report released by Fitch Ratings, which warned that the market was still vulnerable to a sudden downturn.Index-based products traded more heavily than single-name credit default swaps (CDS) for the first time, at $22.2 trillion against $20 trillion notional, Fitch said. And the share of products referencing low-quality debt also continued to rise: 38% referenced speculative-grade or non-rated debt, compared with 34% in 2005 and 18% in 2003. Fitch said this represented a continuing search for yield in a low-spread environment.
Looking forward, the agency said market participants expected continued but slower growth of between 11% and 50% this year, led by growth in collateralised debt obligations, loan CDSs and traded indexes. The market was most likely to face problems related to a turn in the credit cycle or the lack of adequate documentation for LCDS transactions.
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