04 March 2016 by pdonnat
The attached grapple provides an impressive view on the strength of the recent credit rally. Over the last 10 days, the average CDS premium of US investment grade energy companies - from Apache to Valero - has tightened from 4,25% to 3,25%. We are trading back at early December levels. Some technical factors like the coming CDS roll in March can explain the squeeze. On March 21, the on-the-roll CDS contract maturity will increase by 6 months from December 2020 to June 2021. Investors are expected to unwind their credit hedges on the off-the-run contracts. But, the price action in the commodity market is the main driver of this movement. The oil is close to be flat on a yearly basis. Having found a floor on the oil price, the energy complex credit risk has quickly differentiated the survivors from the one which can not survive an oil in a 30-40 price range. A company CDS premium is a function of its assets volatility, less volatility on oil will keep pushing credit premia lower on the the first set of companies.