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Quant Quake After Shock

28 February 2018 by pdonnat

February 2018 will be first reminded as the quant quake on VIX related products. But, the credit default swap market felt the shock as well. Credit default swaps investors were caught off-guard especially on the credit index swap market. Investment grade indices are closing the month 25% wider - trading both in the 55bps context at the end of February. Most of synthetic activity took place on indices (visit OTCStreaming) and the indices under-performed the single names. Investors are starting to assess the consequence of the end of the irrational exuberance on risky assets, the consequences on rising interest rates. Looking at the month monthly performance of our clusters (sets of correlated CDS), the US Energy sector was the largest under-performers (all bubbles should be on as straight line if CDS were moving with a beta of 1). This is similar to what happened on the equity market. The Energy sector is as well the worst performer of the SPX in February (-10%) while the following under-performer is the SPX Consumer Staples (-7%). Changing the span from 1M to YTD on the Grapple offers a quite different picture. The Energy sector was a top performer in January, it is just back in line with the overall market. The synthetic market does not show yet a huge rotation on the rate sensitive sectors, especially the high yield issuers which are more sensitives to their forward refinancing rates. We will have more opportunities to grapple with rotation in the months to come.