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CDXHY22 Back To Its Issue Price… Not

22 May 2014 by HCM

Today, the CDXHY22, the US high yield index, eventually traded through levels last seen at the very end of March when it was issued. And still risk premia are effectively wider… The very last drop is actually a purely technical effect, due to the default of TXUE (Texas Competitive Electric Holdings Company LLC) which has settled yesterday. On the back of this settlement, TXUE was removed from the index, which will comprise 99 constituents going forward as opposed to 100 when it was launched. As the expected recovery rate of TXUE has long been estimated to be very low, this name was weighting down on the index, and its removal makes CDXHY22 a much better quality basket. CDXHY22 initially included 100 names, which means each constituent represents 1% on the index. TXUE was roughly valued at 5cts on the dollar, so it was dragging the index price by 1%. If you look at the 5y index, that is the equivalent of 20bps. The drop in risk premium which took place yesterday from 351bps to 331bps on CDXHY522 is entirely down to the TXUE effect. A 20bps tightening in the 5 year risk premium of a credit index is not necessarily good news for investors.