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Persistent weakness in European Credit

25 September 2015 by pdonnat

This Friday, the credit market underperformed significantly the equity market. The credit indices are closing nearly unchanged while the equity indices are closing up 3% in Europe. Investors are reviewing the risk reward of their investment grade portfolios, especially in Europe post VW outrageous conduct and a lack of support on mining companies. The European investment grade credit index which was the safest credit instrument has broken its positive perception. In September, among the 125 iTraxx Europe members, the 10th decile of the largest premiums has reached five times the level of the 90th decile of the lowest premiums. The ratio was between 3 and 4 post the European crisis, and it was just below 4 at the end of August. The credit risk is coming back quickly in European. More problematic, the iTraxx Europe Series 24, one of the strongest credit instrument, has traded really poorly in the afternoon before cooling into the close. Next week, we could have volatile sessions with monthly and quarterly rebalancing. If investors are looking to hedge their credit exposures with a cheap iTraxx Europe index, not everyone will be filled.