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Signs Of Stress Under The Surface

14 June 2017 by lberuti

At the moment, if you look at credit indices, they appear rock solid. The march tighter of their risk premia has seemed unstoppable since the first round of the French presidential election 6 weeks ago. In Europe, iTraxx Main and iTraxx Crossover went from 77bps to 56.5bps and from 301bps to 235bps respectively. In the US, CDX IG went from 69bps to 59bps. CDX HY was the odd one out and only tightened 4bps from 329bps to 325bps. None of the constituents of this index have been stable though. Most have followed the same pattern as the rest of the market and saw their risk premia tighten meaningfully, while some – roughly the energy sector and the consumers cyclical – experienced some very tough times. On average, the risk premium of High Yield energy names in the US blew up 8%, from 374bps to 405bps, while the risk premium of High Yield financial names shrunk 7%, from 300bps to 279bps. Despite the globally positive environment, signs of stress are appearing in some compartments of the market, and it will be interesting to keep an eye on the energy sector, especially if oil keeps falling at the same pace as recently – it dropped 15% over the last few weeks and is back to its lowest level of the year -.