23 June 2017 by lberuti
We discussed yesterday the move of the cost of insuring debt issued by operating companies of Swiss and UK banks, which collapsed after IHS Markit announced such Credit Default Swaps would not be included in future series of iTraxx indices. The move affected CDS referencing senior and subordinated debts, and investors were already baffled by its magnitude. But it was nothing compared to today’s bloodbath. People sold protection on senior and subordinated debt, as if there were no tomorrow. Swiss and UK names were the most affected, but no name escaped the rage, and every single risk premium in the financial sector, banks and insurers alike, was indicated tighter at the end of the day. What started with a purely technical situation – the risk of illiquidity of some CDS coupled with some orphaning worries – turned into broad-based capitulation for no obvious reason. iTraxx Financials Subordinated, which traded at 155bps a couple of days ago, closed at 124bps tonight, a move only seen in the recent past after the first round of the French presidential election, when investors celebrated the quasi certain win of the most euro friendly candidate. Next week should see plenty of relative value trade ideas put in front of investors by their favourite dealer.