Europe sovereign CDS falls but off intraday lows

The cost of insuring most euro zone government debt against default fell on Wednesday in thinning liquidity as market participants closed out short risky positions after Germany banned speculative bets in some assets.

Germany banned naked selling of credit default swaps backed by euro zone government bonds and naked short-selling of sovereign debt.

The iTraxx SovX index of Western European credit default swap prices fell by three basis points to 121 bps, data provider Markit said, adding bid/ask spreads were widening reflecting low liquidity as investors puzzled over how the ban would be enforced outside Germany.

"There are many unanswered questions at this stage, including how Germany will be able to enforce bans on CDSs when the contracts, which trade mainly under UK and U.S. law, are dealt by German institutions outside of the German territory," BNP credit analysts said in a note.

Greek five-year credit default swaps were 20 basis points tighter from Tuesday's close, with bid/offers as wide as 100 bps, roughly twice as wide as seen the previous session, Markit added in a note. The spread had tightened to as much as 530 bps earlier on Wednesday.

Portuguese CDS edged out by 10 bps to 280 bps, having fallen as low as 220 bps earlier on Wednesday while the Spanish spread was little changed from Tuesday's closing level around 180 bps.

"After the sovereign tightening at the open – investors were looking to unwind hedges and close out short risk positions – sovereign spreads have widened back out again," Markit said in a note. "The market is awash with rumours and protection buyers have come back into the game."

Markit said while the ban only applied to institutions operating under German securities watchdog Bafin, there were fears that a European Union ban could be coming later this year.

France said it was not contemplating banning naked short selling on European debt and that it had not been consulted.