11 April 2017 by lberuti
It all began as if it could be a rather ugly session. Credit indices traded wider as soon as they opened, and reached rapidly the wides of the new series (Itraxx Main @ 77.5bps and iTraxx Crossover at 295bps). But then they found it very difficult to breach these levels. With, the OAT/Bund spread – the difference in yield between French and German 10-year bonds –, which has been the best French election induced stress thermometer, stabilising at 75bps around mid-morning, the reach for protection seemed to run out of steam. Despite all the noise about geopolitical risk, all the headlines about Korea, Turkey and Russia, there was no follow through in the initial weakness. Everyone realised that the Easter week-end is a only couple of days away and that exiting hedges could prove tricky if sentiment turned for any reason. All of a sudden everyone had enough protection on their book, and even options’ implied volatility stopped trading up. While during the last few sessions every option trade was the opportunity to rerack implied volatility higher and the offer that got lifted became the new bid, options to buy protection were offered on this afternoon. It might not last, but today market participants felt (too) short risk.