As you may recall CDS went into overdrive at the height of the crisis particularly over Greece threatening to bring down the eurozone.
It was the immense volatility that led to policy makers blaming CDS for increasing bond spreads and exacerbating the crisis in Europe and led to an EU ban on speculating in the market.
Before the short selling ban came into effect last November, traders cut positions. French net notional CDS (which were seen as the yard stick for a eurozone implosion) have fallen 29% over the last year to $13.7bn from $23.5bn.
Even though Portuguese CDS have recently shot up 20% last week, traders are mostly ignoring the moves preferring to focus on bond moves as their indication on sovereign risk.
Italian bond futures have become the new darling for betting on the crisis with the Eurex open interest doubling to 80,000 contracts since the ban was announced in March 2012.
Story from Reuters.
Of course the improvement in the view of the European crisis will have led to CDS falling out of favour, but any further jolts in sovereign countries will likely be seen in higher volatility in bond markets than normal.
