Markit, the provider of financial information services, is launching a series of indices to track the creditworthiness of sovereign government bond issuers. The indices will be based upon the credit default swap (“CDS”) spreads of the countries concerned.

The Markit iTraxx SovX family of indices will initially comprise the following:

• Markit iTraxx SovX G7 – tracking the credit risk of the most industrialised countries in the world.
• Markit iTraxx SovX Global Liquid IG – tracking the credit risk of countries in Asia Pacific, Eastern Europe, Latin America, Middle East & Africa, North America and Western Europe.
• Markit iTraxx SovX Western Europe – tracking the credit risk of 15 countries in Western Europe.
• Markit iTraxx SovX CEEMEA – tracking the credit risk of 15 countries in the CEEMEA region.

In its press release, Markit notes that the trading of sovereign CDS used to be limited to emerging market governments, reflecting the credit risk associated with these countries. However, an actively traded CDS market in industrialised sovereigns has now emerged as a result of the financial crisis and growing investor concerns relating to the solvency of developed economies.

The first sovereign credit risk index was launched by US firm Credit Derivatives Research (“CDR”) earlier this year, and was covered by IndexUniverse.eu here and here. CDR’s government risk index is based on the equally-weighted CDS spreads of all G7 members, excluding Canada, plus Spain. The GRI index level rose sharply from September 2008 onwards, after governments intervened to support the financial sector, and hit a peak in early March this year, from where it has subsided somewhat, although default risk remains well above the levels that prevailed before the collapse of Lehman Brothers.

Markit said that its indices have been designed to meet investor demand for a transparent and standardised tool to monitor the sovereign CDS market and gain access to the asset class on both a regional and global basis. The creation of this alternative investment tool is expected to bring more investor demand for sovereign credit, the firm added.