The ability to ‘trade rumours’

The credit default swap market has rapidly become recognised as one of the most responsive financial indicators, in some cases foreshadowing even the equity markets. From Ahold to WorldCom, the CDS market has priced concerns in long before other asset classes

It is often said that CDS prices are a very telling indicator of the credit quality of their reference entities. But the closeness of the relationship between CDS prices and trends in underlying credit quality is much less frequently proven, even though a cursory retrospective glance at pricing history in the CDS market demonstrates very clearly that credit derivatives can act as an early warning signal for credit deterioration. By the same token, of course, they can serve as an