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Credit Is A Rock

05 February 2015 by lberuti

Since the beginning of the year, a quick poll among market participants on all asset classes will produce a unanimous answer: “volatility is back”. Rates, equities, currencies, commodities have all already experienced wild swings in 2015. In that respect, credit seems to be the odd one out. There were some moves, but they have been fairly orderly. That can be seen on the above grapple which graphs the basis of iTraxx Crossover (i.e. the difference between the quoted value of the index and the theoretical value derived from the prices of its constituents). This index is usually the most volatile, and the daily changes in the basis are an indication of the velocity of the market. Indices serve as investors’ favourite hedging tool, and they tend to react quicker to news than single name CDS. Despite a few bumps, the basis has been stubbornly negative (the index risk premium is tighter than the risk premia of its constituents) and has stayed in a narrow range.