09 January 2014 by HCM
Today was the first day of consolidation since the beginning of the year, as the market wanted to take a breather ahead of the tomorrow’s NFP.
Nevertheless, this grapple describes well the trends since the beginning of the year. The outperformance of the peripheral is clear from the tightening of the SovX index which overweights periphal countries. The outperformance of Xover compared with Main shows the hunt for yield which led to some compression.
The underperformance of the Sub Financial index compared with the Senior Financial index reflects the recent doubts expressed by some investors regarding the timing of the implementation of the new CDS documentation which will incorporate a “bail in” credit event. Future CDS on financial entities will offer much better protection, and people had anticipated a switch out of existing CDS into new ones once they are available, especially in the subordinated space. Some sold sub protection on the back of it. The March 2014 implementation is now questioned and could be delayed, hence the widening of the Sub index.