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CDS Tighter… Curves Unchanged!

19 February 2015 by lberuti

At the beginning of the year, a number of analysts recommended investors to position themselves on the longer end of the curve. In a yield hungry market, they argued that longer dated maturities would entice people. This grapple plots the difference between 10-year and 5-year-risk premia for the different sectors in the European investment grade universe as a function of the 5-year-risk-premia. It is obvious for all to see that 5-year-risk premia have decreased across the board, as all the pin-heads are pointing left. But it is also obvious that all these pins are almost horizontal. So if 10-year-risk premia are tighter, there was hardly any benefit (if any) in selling longer dated protection compared with selling standard 5-year-contracts. This is consistent with a number of issuers coming to the market with new deals in the 8 to 10 year maturity bucket since the beginning of the year (money is currently free, so why not lock it for the longest possible period), thus putting a bit of pressure on longer dated yields.