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One Strike Too Far

20 February 2019 by lberuti

There is an overhang of protection in the market after the last few weeks and no one seems too keen to pick it up. Some of it was housed in options that expired today, and some short covering took place on the back of it. But generally speaking, it was a relatively quiet option expiry. The market has rallied so hard over the last 10 sessions – not to mention the rally since the beginning of the year that took investment grade credit indices 28bps tighter to 61bps in the US and 27bps tighter in Europe to 66bps! -, that all the strikes with a large open interest (around 70 and 75bps on iTraxx Main and 325bps on iTraxx Crossover) were broken long ago and were too far to have any meaningful impact on today’s trading pattern. iTraxx Main (ITXEB) reached current series’ tights, and nothing can stop the move at the moment. The spread between ITXEB and iTraxx Financial Senior, which is a good “bullishness” indicator of the market was down another bp today – it closed at 14bps -, despite the widening of BTPs against bund. Many investors who were holding short risk positions have been forced to throw the towel, and with the roll within sight, it will take a very brave man to call the end of the rally.