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Spreads Down, Fed Up

31 January 2019 by jbchevrel

Today was a fully risk-on session that saw credit spreads tighten across the board. The iTraxx Main s30 index tightened by -3.5bp, while its US counterpart the CDX IG s31 tightened by -5.2bp. This aggressive move comes after a surprisingly dovish step taken by the Fed last night. Firstly the removal of “some further gradual hikes” in the forward guidance, and secondly the restating that the balance sheet size/composition was another tool to adjust policy, were dovish/unexpected. Powell repeated that future policy would be data dependent. Banks economists expect the US economy to grow 2-3% this year. The $ was better offered on the moment but remains strong vs € in particular, and the 1y1y $ OIS, which has retraced from ~205 (Jan 3) to ~240 (Jan 18), is now already back to ~220. In single-name CDS space, however, one name saw a contrarian price action on the day. KPN (Koninklijke KPN N.V.) widened 60bp, more than doubling its 5y CDS spread, on news that Canada’s biggest AM weighs bidding for it. Bad news for credit, potentially, but in the short term a good news for the stock, that is up 6.5% on the day. Decent price action, although the discussion is reportedly only at an early stage. This came a few hours after KPN reported for Q418. Overall a decent set of results with strategy reiterated, but leverage is already on an upward trend (net debt/ebitda came from 1.5x to 2.7x in one year).