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Did I Miss One Of Kylie’s Tweets?

23 February 2018 by lberuti

There was not a lot of actual news on the tape and most risky assets traded sideways. US equities even managed to creep higher as interest rates eased on both side of the Atlantic (US 10Y lost 5bps at 2.87% and German 10Y lost 5bps at 0.65%). But credit indices did not manage to shake that bearish sentiment. The weakness continued all day and they widened almost in a straight line until mid-afternoon, before stabilising within touching distance of their widest levels of the session. It appears that a few hedge flows were to blame for the continued bid for iTraxx Main CDS, as options providing downside protection expiring late March were particularly sought after. These flows are consistent with the persistent market unease regarding the Italian elections’ outcome as they cover the date of the poll which will be held on the 4th March. Unless of course they are based on one of Kylie’s tweets I may have missed saying that selling protection is “soooo last year”.

Too Much Italian Risk Priced In?

21 February 2018 by lberuti

Today was option expiry. Despite all the promises of volatility and exacerbated moves as large negative gamma positions were supposedly open at strikes close to current levels on most indices, the market did not live up to the hype. After a weak open, all credit indices trended tighter towards their closing levels without any acceleration at any point. The main takeaway from the session is that the recent underperformance of iTraxx Europe (ITXEB) compared with CDX IG appears to have stalled. Over the last few sessions, investors bought protection on peripheral financial institutions in a bid to protect themselves against any adverse outcome of the Italian elections on the 4th March. That pushed iTraxx Financial Senior (ITXES) to trade a couple of basis points wider than ITXEB while it was trading 1bp tighter 10 days ago. It created a bearish sentiment in Europe where ITXEB traded sideways while CDX IG moved away from its widest levels. ITXEB underperformed CDXIG by 8bps since the 9th February. Both indices traded flat to each other yesterday, which, at least temporarily, seems to mark the end of that trend. Tonight, CDXIG closed at 54bps, 2bps wider than ITXEB.

The Amazon Effect

20 February 2018 by lberuti

The take-over of Whole Foods by Amazon is still reverberating in the industry. Retailers have been under growing pressure from online competitors, and the corner drugstore has been no exception. Grocer ABS (New Albertson’s) announced today that they will buy what remains of RAD ( Rite Aid Corporation ) in a deal that will continue to reshape the US retail and health care industries, after RAD failed to sell itself to Walgreens. The resulting entity will have about 4,900 stores – including 4,350 pharmacy locations - in 38 states, and the pharmacies will be rebranded under the Rite Aid name. The planned combination is projected to have $14Bln in debt, and its debt to EBITDA leverage is expected to stand at 4.1x, higher than ABS’s 4x, but lower than RAD’s 4.5x. Most of the bonds issued by RAD are callable and investors expect them to be redeemed during the process of the merger. A lot of these bonds are currently held in portfolio where the credit element has been stripped by the purchase of Credit Default Swaps. The anticipation of these positions unwinds is probably one of the drivers of the collapse of RAD’s 5-year CDS which closed 239bps tighter at 501bps.

It’s The Liquidity, Stupid

19 February 2018 by lberuti

In the absence of the US, no one really expected massive volumes to go through. And that is exactly what happened with less than €5Bln notional of iTraxx Main trades reported to the SDR. That is less than half the daily volumes of last week. There were a couple a single name stories with Daimler (5-year CDS +3.5bps @ 45bps) still embroiled in the emission defeating device scandal in the US and UPC (5-year CDS +16bps @ 146bps) rumoured to eye Swiss mobile providers Salt or Sunrise. But away from that, single reference CDS were quiet and closed broadly unchanged or perhaps even tighter, as market participants prefer to cut shorts after a few weeks of volatility. This was in contrast with the weakness in stocks and credit indices. It felt like we had a big short squeeze on Thursday and Friday into the US bank holiday, and that we are now reversing part of the these moves. That led to a general widening of bases (difference between the quoted value of an index and its theoretical level computed with the value of its individual constituents) in Europe as all credit indices unperformed their fair values.