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Shock And Awe

11 March 2015 by lberuti

Not long ago, no one would have predicted that a 2.5bps move in the German 10-year interest rate would represent a 10% move, but this is what happened today! QE only started officially on Monday, but the results have been impressive so far, and credit has been impacted like almost every single European risky asset. It is fair to say that a number of investors had anticipated the move, but the performance since the beginning of the year says it all. While CDXIG is almost unchanged at 65bps compared with 67bps on the 2nd of January, iTraxx Main has seen its risk premium tighten 12bps from 61.5bps to 49.5bps. Except during the height of the Lehman crisis, the spread between the 2 indices has hardly been that wide, even when the risk premia of banks (which are not included in the US indices) were effectively worth 0 back in 2006-2007. The same is true when you compare iTraxx Crossover (ITXEX) in Europe with CDX High Yield (CDXHY) in the US. Adjusted for the defaults of RSH (Radioshack) and HET (Caesar), CDXHY is unchanged at 323bps while ITXEX is 78bps tighter at 255bps. It does not leave much room for any misstep in the handling of the Greek situation.