22 September 2017 by lberuti
In the credit derivatives market, this week was all about rolling CDS positions. The maturity of so-called 5-year CDS has been extended from June 2022 to December 2022. The longer the maturity of a CDS contract, the higher its risk premium is. In the US, given where the June 2022 maturity was priced on Tuesday night, December 2022 was almost priced to perfection when it started trading on Wednesday. The same cannot really be said for shorter maturities. When the December 2020 CDS - aka the new 3-year contracts - started trading on Wednesday, they were indicated at roughly the same levels the June 2020 CDS closed on Tuesday. Dealers have been asked relentlessly to show bids for short dated protection by carry hungry investors, and none of them cares to buy any more. The result was an agressive steepening of the risk premium curves across the board. While a 3-year risk premium trading at 50% of the 5-year risk premium has long been considered an opportunity to buy protection, they are now trading on average at 40% in the US investment grade universe.