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The Great Decompression

03 February 2014 by HCM

Given the magnitude of the move in equities today, credit was relatively well behaved. iTraxx Main traded in a 3bps range, which is nothing compared with the roller coaster sessions we experienced last week. That left (again) decompression as the main feature of the day, with Xover underperforming Main, but it was most obvious between the Itraxx Financial Senior (ITXES) and iTraxx Financial Subordinated (ITXEU) indices. The latter move was triggered by the ISDA’s decision not to implement the change in the CDS definition initially scheduled for next March before September 2014. That means in particular that contracts giving more rights to buyers of protection on subordinated debt will not be available for another 8 months. Investors, who had been reluctant to buy protection which would have turned second best in 6 week time, were not willing to wait another 2 quarters before hedging their portfolios and pulled the trigger.