Volatility is now the name of the game in the CDS market, and it is likely to remain the case for the rest of the summer.

Establishing the direction of the credit markets has become a difficult business. Spreads widened sharply following a twin-pronged attack from the Federal Reserve and the People's Bank of China.

The prospect of the Fed tapering quantitative easing this year and the PBOC refusing to provide liquidity in the interbank market was more than enough to trigger the most severe correction since the pre-Draghi "whatever it takes" days last summer.

But the correction ground to a halt after three days, and spreads soon started to recover some of the ground lost. The PBOC had a change of heart and started to provide liquidity to banks, albeit on a selective basis.

And it wasn't long before various Fed officials started to pour cold water on the market's interpretation of Ben Bernanke's comments: the timeline outlined for tapering QE is "only one possible outcome", according to New York Fed president William Dudley.

The mixed messages, unsurprisingly, produced extreme volatility in the credit markets. The Markit iTraxx Europe went from 107 basis points on June 17 to 132bps a week later, before tightening to 117bps by June 27.

European sovereigns didn't escape unscathed, although their movements were modest in comparison to corporates and financials. Emerging markets, on the other hand, were a different story. Spreads in Latin American, eastern European and Asian names whipsawed violently, and liquidity suffered in certain names. Bid-ask spreads in China - one of the more liquid sovereigns - doubled to 10bps.

Participants, though, were still willing to trade, as can be seen from the latest DTCC volume figures. Eight of the top ten names with the highest amount of trading activity were emerging market sovereigns, up from five the previous week.

Italy, which usually sits at the top of the table, plummeted to sixth position, behind Brazil, Turkey, Mexico, Korea and China. This underlines how CDS are still an effective, liquid instrument for hedging risk and taking positions.

Even with the central banks playing down the effect of their actions, it seems likely that further volatility lies ahead. The next hurdle will be the US jobs figures on July 5th. The Fed has made an explicit link between the unemployment rate and the speed of QE tapering. A larger than expected fall in the jobless numbers could spell trouble for risk assets.|

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