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The Biggest Outflow Ever

28 October 2016 by lberuti

Volumes were healthy today, but despite more banks beating expectations when they released their results this morning, credit indices were weak from the word “go”. There was no protection buying tidal wave, but indices traded heavily, particularly iTraxx Crossover (ITXEX). On top of interest rates staying at the high end of their recent range, people pointed to a massive outflow in High Yield ETFs in the US as a possible explanation. 11.5mln shares were redeemed yesterday. That is nearly $1Bln and over 5% of the fund. That was the largest ever redemption to take place in a day. At the moment, investors mainly expressed their caution through indices and fair values have been very stable over the last few sessions. That was enough to push ITXEX basis (the difference between its quoted risk premium and the theoretical risk premium computed using the risk premia of its constituents) back into positive territory. Over the last week, while its theoretical value was 4bps wider, ITXEX widened by 9bps to 329bps. The basis of ITXEX now stands at 10cts. That is hardly enough to entice arbitragers to try and get advantage of it, but they are certainly getting ready.