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Credit Cannot Widen, Can It?

07 July 2017 by lberuti

It was another fairly weak and lacklustre session. Credit indices were pushed wider in the morning as investors were still digesting the sale-off in rates yesterday which took 10-year rates at their highest in 18 months in Europe. But it never felt that the market was about to melt, and no one rushed to add hedges to the downside. Quite the opposite happened actually. Most people looked at it as an opportunity to “buy the dip”. It was obvious in the option market. Hardly anyone was buying payers - which give you the right to purchase protection - and enquiries received by dealers came from investors asking to buy receivers – which give you the right to sell protection – across August, September and October expiry, with the 52.5 and 55bps strikes very popular for iTraxx Main. Market participants feel very relaxed about any downside at the moment, and they are more worried about a sudden rip tighter in risk premia.