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The March Towards Zero

31 August 2016 by lberuti

We have already highlighted how low the volatility has been throughout the summer. Since the 12th July, the S&P has not experienced a daily variation in excess of 1%, and it has remained in a 1.8% trading range. The very same was true for credit, with iTraxx Main (ITXEB) in Europe and CDXIG in the US staying in a 6bps corridor over that period. iTraxx Crossover had no daily variation bigger than 9bps, and the European high yield benchmark stayed in a 27bps range during these 7 weeks. With the market at a standstill, dealers have had plenty of time to adjust valuations, and it is therefore not entirely surprising that bases (difference between the quoted values of credit indices and the theoretical value computed with the levels of their individual constituents) have all converged towards zero, while they were at very negative levels earlier in the year. There is reason to think that the next few months will see more action (we could get rate hikes, more central banks activity; we will have a CDS rolls in 3 weeks; there is a busy political agenda around the globe), arbitragers certainly do hope so.