09 November 2016 by lberuti
“What happened?” is the question many people were asking themselves in Europe when they woke up and see that one of the most controversial character in US politics was announced president elect. Donald Trump won comfortably the presidential election and will become the 45th president of the US. The first market reaction was one of caution as there are many unknowns regarding policies that will be conducted going forward. All risky assets tanked, among them credit. iTraxx Main and CDX IG opened 8bps wider at 81bps and 85bps, while iTraxx Crossover opened 35bps wider at 360bps. But rapidly profit takers emerged and begun to sell protection. From these early wides, the whole session turned out to be a consistent grind tighter, bar a spell of stability for a couple of hours before the US came in. The amount of hedges that had to be unwound was unexpected. Volumes traded on every single index were roughly twice their daily average, and, at the end of the day, all credit indices were unchanged compared with yesterday’s close. The same was true for most risky assets - after an incredibly volatile day though -, except interest rates. The US 10 year interest rate closed 20bps higher at 2.05%. So far, any rise in rates has triggered a widening in credit risk premia. If there was no election and 10 year ramped to 2.05%, would we have had that kind of rally? People were left wondering “what happened??”.