The following is an excerpt from MCDX Municipal CDS index on the rise, Credit Default Swap Market
Question:
The 5-year MCDX increased from 115 bps to 209 bps during the period from April 20 to June 11, 2010 and had nearly doubled 11 days later when it closed at 226.5 bps on June 22. Between September 28, 2009 and April 20, 2010, the index had only increased from 90 bps to 115 bps.
The reason for the rise has been obvious, if not evident in CDS market prices, for quite a while now. Ballooning municipal deficits and lower revenues are creating fiscal problems for many states across America. California and Massachusetts have both announced probes (though mostly inconclusive to date) into municipal CDS trading while Illinois has seen its credit default swaps achieve the status as riskiest state in America.
(a) What is meant by a 5-year MCDX?
(b) What is the link between the “ballooning municipal deficits and lower revenues” and the increase in CDS spreads?
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Step by Step Answer:
a A 5year MCDX is a credit default swap CDS index of 50 municipal credits ranging from general obligation debt to revenue bonds from municipal authorities excluding tobacco and healthcare bond issues ...View the full answer
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