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Always Read The Small Prints

22 March 2017 by lberuti

The new series of CDX HY, the benchmark for high yield credit in the US, will be launched next Monday. Series 28 will bear a Jun 2022 maturity like all other 5-year indices launched in March 2017, and, like previous series of CDX HY, it will include 100 constituents. That might not last long though. When SHLD ( Sears Holdings Corp ) released their annual 10-K filing yesterday, they added so-called going concern language. Acknowledging “substantial doubt” about its future raised fresh concerns about the survival of the company among investors who sent the stock tumbling down and the 5-year risk premium through the roof. The company tried during the day to calm things down and said they remained focused on executing their transformation plan, which includes assets sales and an aggressive cost cutting program. It stopped the rot, but SHLD was still the worst performer of the consumers sector today.

Action at last!

21 March 2017 by lberuti

It looks as if everyone tuned it to watch the French presidential debate yesterday night and decided that Mr Macron – moderate candidate - put a decent enough performance that comforted them in the belief he will crush Mrs Le Pen – far right candidate - if the pair were to face each other in the decisive second round of the election. Everybody seemed to cheer, and the credit market squeezed pretty hard in the morning – iTraxx Main (ITXEB) was a couple of bps tighter at 74bps and iTraxx Crossover 8bps tighter at 287bps -. But the sentiment switched in the afternoon as it surfaced that Mr Trump’s healthcare bill could potentially not pass Congress. All of a sudden, investors seemed to question his ability to get the planned tax cuts through and the whole reflation trade appeared to fade in the second part of the afternoon. Credit indices went back very quickly to unchanged levels on the day. At the end of the session, the only sign of the intraday volatility was the bases which all closed more positive, as the speed of the move left single names behind.

Spread Hunter

20 March 2017 by pdonnat

The spring equinox, at 10:28, UK time, was preceded at 08:00 am, by the credit index roll. On-The-Run credit indices in Europe are the Series 27 and, in the US, the Series 28. The 5 years’ standard contract, the most liquid one, is now maturing in June 2022. The extension of maturity from December 2021 to June 2022 has a cost. The new indices are trading wider than the former indices. The iTraxx Europe is trading 7bps wider, the Crossover 22bps, the CDX.NA.IG 6.5bps. These additional premia are lower than what the index members are suggesting. The new CDX.NA.IG should be 10bps more expensive. This is a reflection of the investors positioning. Investors are long risk on US investment grade indices, additional premium is always a bargain. The investors bought back protection on former series to sell protection on the new one. On the attached Grapple, we notice that the new index is trading much tighter than its fair value while former indices are cheaper. The spread hunters have chased today the pick-up in premia.

A Dovish Hike

17 March 2017 by lberuti

At the end of their meeting, the FOMC decided to raise interest rates on Wednesday. As expected by the market, they delivered a 25bps hike to the Fed funds rates. They also only made minor changes to their projections, and in her press conference, Mrs Yellen largely reaffirmed that there was no change in the Fed’s thinking of the economic or policy outlook. She also added that 2% inflation is a target rather than a ceiling and acknowledged that it could temporarily shoot above that level. That part probably took the market slightly off guard, investors having positioned themselves quite defensively ahead of the decision. That led to some eye-catching moves on interest rates, with 2y and 10y US rates rallying roughly by 10bps. The effect was also felt in the credit market, and indices moved aggressively tighter after the decision – they are back to the tightest levels of the current series, ie 70bps for iTraxx Main and 61bps for CDXIG -. The results of the Dutch general elections also played their part and added another feel-good factor, but anyone who would not be aware of the actual FED’s decision would be forgiven to assume they had stayed put!