Blog

Our Experts Comment the Times Series

See All the Comments
rss

Indices Are Rich

05 April 2018 by lberuti

What a rip! The tone in the credit market was strong from the word “go”. The strong overnight close in the US was due to a move that took place after Europe went home. It triggered a rally in equity markets and credit indices alike. Eurostoxx finished up 2.5%, iTraxx Main 2.5bps tighter at 57.5bps, iTraxx Crossover 7bps tighter at 283bps, CDX IG 4.5bps tighter at 62.5bps, CDX HY 19bps tighter at 349bps. In creditland, CDS referencing single entities followed suit to a certain extent, and they were tighter across the board. But it seems that recent protection buying from clients has left dealers keen to cover some long risk positions. It created some viscosity and single name CDS were a bit slower to tighten. It has been the case for a few sessions now, and it has caused indices to outperform their constituents since the beginning of the month. The credit index market is back in a configuration where bases – the difference between the quoted value of an index and its theoretical value computed with the individual prices of its constituents – are negative across the board. It is cheaper to buy protection using the indices than it is to buy single reference CDS, in the US and in Europe. Credit indices are rich compared to their fair values.