BEAT FOCUS: CDS Index Roll Trade Ideas Start To Appear

LONDON (Dow Jones)--March came in like a lion for European credit markets,with Markit iTraxx indexes making new wide levels (again) on deterioratingfundamentals (again) and negative technicals (again).

As one trader put it Tuesday: "To tighten in this market, you need strong,positive momentum on equities, the economy, and earnings."

That momentum is unlikely to build in the near-term, so credit investors won'tstep back in soon.

In a note Friday, Lehman Brothers strategists suggested that investors startbuilding long positions when the Europe index reached 200 basis points andCrossover 1,000 basis points.

Lehman doesn't expect the indexes to hit these levels in the near-term, and itwarned that these levels are for the current series so will not benefit fromsurvivorship bias. They also include anticipated defaults and do not compensatefor the removal of credits that default from the index.

Still, credit markets have some way to go to reach a fundamental bottom.

But in the meantime, couldn't some of those horrific technicals be made towork in an investor's favor?

Well, it's March. That means the CDS index roll - when names enter or leavethe indexes according to ratings, spread, and other criteria - is coming roundagain.

Roll technicals are tradable, although that might have been forgotten in thecurrent excitement.

Barclays Capital has looked at those names which might enter or leave the Europe and Crossover indexes.

By ratings criteria, Kingfisher (KGFHY) and UPM (UPM) are likely to leave the Europe index, with Capgemini (CGEMY) and Sol Melia (SOL.MC) possibly leavingCrossover on both rating and spread grounds.

Invensys (IVNYY) and HeidelbergCement (HEI.XE) could also leave Crossover onspread criteria (too tight), while M-Real (MRLBV.HE) has a different problem -at around 1,500 bps its 5-year CDS spreads are too wide for inclusion.

Eligible, liquid names that could go into Crossover include ITV (ITV.LN),Evonik Degussa, Kingfisher, UPM, BAA, Fiat (F.MI), and Wendel (MF.FR).

Lastly, BarCap's list of potential leavers from Crossover, based on its ownassessment of their liquidity is: International Power (IPRPY), Stora Enso (SEOAY), British Energy Holdings, Nordic Telephone, FS Funding, FCE Bank, Basell,and Tim Hellas (TIMHY).

History suggests investors will look to roll shorts into the new on-the-runindexes, and that these shorts will get rolled ahead of long positions. S8 namesthat will not feature in S9 should outperform S9 names.

So potential trades include selling protection on Heidelberg, Invensys, SolMelia, or Capgemini versus buying European index protection.

Or investors can sell Crossover protection and buy ITV or Degussa CDS ahead ofthose names possible entering the index.

Lastly, those names moving from Europe to Crossover might actually outperformgiven the ongoing technical pressures from the structured credit world thatcould push Europe spreads wider still.

Therefore as a tactical trade, investors could sell Crossover protection andbuy protection on names like Kingfisher or UPM, Barclays said.

-By Mark Brown, Dow Jones Newswires; 44 (0) 20 7842 9485, mark.brown@dowjones.com

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(END) Dow Jones Newswires 03-04-08 0949ET Copyright (c) 2008 Dow Jones & Company, Inc.