Fitch Ratings says that conditions in the credit default swap (CDS) market suggest that traders are expecting hard times ahead.

In a new report, the firm observes that ongoing volatility, and large spreads, in the CDS market indicate continued widespread concerns in both financial and non-financial services sectors. Fears about the financial services sector are being driven by the current housing/credit crisis, and non-financial sector worries are coming as a result of the overall economic slowdown.

“The combined effects on the economy of the depressed housing market, the credit crisis in general and higher energy prices have led to concerns about an increase in the corporate default rate,” said Fitch managing director James Batterman. “The result has been sharply higher spreads compared to early last year, which is indicative of the consensus view of further challenges ahead.”

Fitch’s review examined changes in spreads and trade volumes by industrial sector for both U.S. and Euro denominated CDS, and highlights the extent of trading activity of some of the more liquid names, including those that have experienced significant difficulties over the course of the credit crisis.

“We have seen defaults pick up appreciably, with the trailing 12-month U.S. high yield corporate default rate rising to 3.1% at the end of June versus just a half a percent at the end of 2007. The market view at the moment clearly seems to be that we are in for challenging times ahead,” the report concludes.