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Did Investors Forget About The Roll?

17 March 2015 by lberuti

Today’s session was fully dedicated to consolidation in the credit market. All indices are closing wider, but what is more surprising is that their theoretical risk premia increased even faster. That in itself is not very usual during the first phase of a move one way or the other, but, a couple of days before the roll, this is even more surprising. Indeed on Friday the “on-the-run” (or standard) 5 year maturity will increase by 3 months. The “new” 5 year risk premia of all companies should then roughly increase by 5% compared with the “old” one. That is a rough approximation which assumes risk premia increase linearly as a function of their maturity between 0 and 5 years and that they are worth 0 for 0 year. In fact that very rarely occurs, and risk premia hardly ever completely roll up the curve. Anything between a quarter to half of the expected widening is usually “lost”, and all shorter dated maturities will see their risk premium decrease everything being equal. Decreasing bases right before the roll is definitely not a usual pattern in the run up to the roll, at least in a rather stable market.