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Cheap And Getting Cheaper

24 January 2018 by lberuti

Like during most sessions since the beginning of the year, credit indices have spent the day in very narrow trading ranges. For instance, iTraxx Main (ITXEB) traded between 43.25bps and 44bps today (and between 43bps and 45.5bps since January 1st). The price action has been very consistent throughout January, with a steady stream of protection selling by clients particularly in the investment grade universe. In Europe, while credits belonging to the high yield space have been mixed, CDS referencing high quality corporates and financial institutions have felt extremely well offered. There is currently no appetite whatsoever to protect individual line items in portfolios. The presence of the ECB, which keeps mopping up bonds, is everybody’s insurance against volatility. We are now in the unusual situation where ITXEB is trading at its tightest level since late 2007, but is still cheaper than its constituents. It is cheaper today to buy protection on all the individual members of ITXEB than to buy protection using the index. Doing so, you can save 1bp (or 5cts in cash price on the 5-year index) and that discount has been rising steadily since late December.