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X CDS more fragile than ductile

30 July 2014 by HCM

X (United States Steel Corporation) surprised the market today with a second-quarter profit with cost savings and better pricing power. The CDS dropped 55bps and actually 80bps before the global market sell-off. A BB- high yield premium at 400bps over 5 years is pricing a 30% default probability for a total cost of 20%. This is a very expensive hedge. As a consequence, the CDS does no bend, it gaps on significant news either positive or negative.