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Can CDXHY Keep Outperforming?

03 June 2015 by lberuti

After a bumpy couple of months towards the end of last year of the beginning of this, it has been one way traffic on CDXHY, the benchmark for US high yield corporates. The risk premium for the 5 year point of the series 23 (December 2019 maturity) has gone from 390bps in January to 290bps currently in a straight line. The six month slide due to the shorter effective maturity is worth 20bps. So, even factoring that in, we are still talking about a meaningful tightening. Over the same period, CDXIG23, the equivalent benchmark for investment grade credits, has been stable. The compression over the last 6 months have been impressive to say the least, and appetite for yield seems intact as evidenced by the latest DTCC statistics which saw that clients have increased their long risk positions on CDXHY series 24 by $800mln last week alone. But a couple of days ago, the ISDA Determination Committee has concluded that FST (Sabine Oil & Gas Corporation) effectively defaulted. It means that it will come out of the CDXHY index in a few days. Mechanically, once the riskiest component of the index will go, the risk premium of the index, which is roughly the average of the risk premia of its constituents, will tighten substantially, by around 18bps in this case for CDXHY series 24. Then, the recent compression will be even more obvious for all to see.