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Asymmetry?

23 May 2019 by lberuti

Credit indices have been very well behaved over the last few months, and they have frustrated some of the most aggressive investors who were looking for volatility. In that respect, equities have provided much more fun. But what held for credit indices and for most of their constituents was not true for the whole credit market, and CDS had the opportunity to show their brutal nature in a few instances. Once a name has reached tipping point, CDS become very asymmetrical instruments and risk premia tend to increase dramatically over very short periods of time. Since the beginning of May, that was the case for TCGLN ( Volvo AB ). Its risk premium skyrocketed roughly 25pts upfront (to insure $1 of debt for 5 years you had to $0.25 upfront and then $0.05 per year during 5 years) to 64pts upfront today. During today’s session alone RALFP ( Rallye ) saw its risk premium jumped 15pts from 45pts to 60pts upfront after the stock was suspended pending a company announcement. Market participants were also reminded that selling short dated protection can prove a dangerous game. When WFT (Weatherford International) said they would file for bankruptcy protection, while its 5-year risk premium hardly moved as this outcome was largely anticipated at some stage, its 1-year risk premium went overnight from 25pts to 45pts upfront.