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When There Is No Will

28 August 2018 by lberuti

Since the Turkey tantrum which lasted a week is over, it has been one-way traffic in credit land. Since mid-August, CDXIG tightened in a straight line from 63bps to 59bps, while ITXEB went from 71bps to 65bps. If Turkey’s 5-year risk premium is almost 100bps tighter than its 558bps peak, it is still dangerously close to 500bps, and, at 472bps, it is 60% wider than its early August level. But the market is taking it in its stride. Even though geopolitical risks stubbornly refuse to go away at the moment in Emerging markets or in Europe, despite an issuance calendar that has been gradually building up recently and will only get heavier in September, investors have decided to focus on carry and the incoming roll. The perspective of two shortened weeks in a row – yesterday was a bank holiday in the UK, and next Monday is one in the US – is proving too much for them to buy protection. With the roll coming up and the rosy picture that US stocks are painting, it will take something quite left field to sell off hard in the near term.