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Settlement Auction for Lehman CDS: Surprises Behind

Posted on October 12, 2008

The surprise: no price support at pre-auction bond prices. (No inside bid exceeded 10%, and the inside market midpoint was 9.75%.) The relief: despite a substantial net open interest to sell bonds for physical settlement, barely half of which would have cleared at the inside market midpoint price, the excess supply was soaked up by limit order bids within the inside market's spread, resulting in a final price of 8.625%. There was ample additional demand at slightly lower prices, implying that at least some dealers' bids during the inside market phase really reflected a willingness to purcha...

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bonds , phase