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“Considerable Scope”

30 March 2016 by lberuti

After almost a week of rather hawkish chatter from some of the regional FED presidents, FED Chair Yellen decided to put things straight during her comments yesterday at the Economic Club of New York. She was back to the cautious script she had adhered to so frequently in the past. The need for “caution” was reiterated many times, and she went as far as to say that the committee has “considerable scope” to ease policy if necessary. US risky assets finished up across the board yesterday night, showing the way to European credit this morning. Despite the move lower in oil, all credit indices were indicated tighter and the direction was never really questioned during the remainder of the session. They outperformed equities but the magnitude of the indices’ move outstripped the move of their fair values, particularly on iTraxx Main (ITXEB) on which large clips of protection were sold throughout the day. So much so that the basis of ITXEB closed at its most negative level in more than 3 years (the risk premium of ITXEB series 25 maturing in 5 years is 72cts cheaper than the theoretical value computed using the risk premia of its constituents).