15 March 2017 by lberuti
Today was all about options expiry in the CDS market. The recent weakness felt over the last few sessions had managed to bring credit indices through important pins – open positions on the 65 strike for CDX IG and 72.5 strike for iTraxx Main (ITXEB) were significant -, but it was not enough to break them decisively. As soon as investors started to cover “in the money” options – and they began to do so early in the session -, CDX IG and ITXEB traded down to 65bps and 72.5bps respectively and spent the best part of the day wrapped around these levels. Credit hardly moved at all after the initial move tighter. The sharp bounce in oil – even though it looked like fading into the close – certainly helped the positive tone, and except for these option-related flows the rest was position squaring ahead of the FOMC. Credit is not priced to perfection – ITXEB and CDX IG were 3bps and 4bps tighter respectively a week ago – but there is not an awful lot of room for error and we better have that dovish hike now.