15 January 2016 by lberuti
Today’s price action in creditland was a tad less brutal than it was on stocks, but it was not a walk in the park either, and on the run indices registered their worst day since the beginning of the year. But during that nasty session, iTraxx Crossover Series 23 (ITXEX23) managed to close tighter on the day. There is a catch of course, and it was only due to the settlement of ABGSM’s (Abengoa) default yesterday – the recovery was set at 4.625% which means debtholder were almost completely wiped out. This settlement means that ABGSM has effectively been removed from the index, and this morning people begun trading version2 of ITXEX23. When it was issued, ITXEX23 included 75 constituents, each weighting roughly 1.33%. ITXEX23 has a 4.5 year residual maturity, so removing a constituent with a risk premium that was close to 100% improve the risk premium of the index by 1.33%/4.5=30bps. All taken into account ITXEX23 is effectively 20bps wider on the day, which is consistent with what can be seen the grapple graphing ITXEX24.