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Is iTraxx Financial Tighter Than iTraxx?

22 January 2015 by lberuti

For the first time in a while, the theoretical value of ITXES522 (iTraxx Financials Senior 5 year series 22, the on the run index), which now stands at 58.0 bps, has gone through the theoretical value of ITXEB522 (iTraxx Main Europe 5 year series 22, the on the run index), which now stands at 59bps. A very pro-active ECB eventually managed to bring the risk premia of all the peripheral banks in line with the others. That explains the gradual compression between financials’ and other investment companies’ risk premia in Europe. As investors felt more confident regarding the prospects of European credits as a whole on the back of the ECB action, they have sold protection on iTraxx Main. That now translates into a deeply negative basis, iTraxx Main is trading 4bps tighter (or 20 cents more expensive) than its theoretical value. At the same time, tensions between Russia and Ukraine have not abated and elections will be held in Greece over the week-end, which could raise questions about some financials which represent a big chunk of most investment portfolios. So any hedging activity done with indices lead almost inevitably to a persistent bid on iTraxx Financials, which is the case at the moment and has led to a positive basis. The difference in basis explains why iTraxx Main is 5bps tighter than iTraxx Financials even though its fair value is 1bp wider.