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Grexit or Grefix?

19 June 2015 by pdonnat

Uncertainty is at its highest level of the year in the European market. Today price action was hectic but it was more a reflection of actual risk premium. Credit index were tighter with hedging reduction especially the iTraxx Crossover which is pricing 5% of default rate per year over the next 5 years. Investment Grade (IG) cash has under-performed: in case of a Grexit, IG spreads will widen more than any other credits due to the increasing systemtic risk, in case of a Grefix (let us try it) rates should be higher. Credit curves have stopped steepening. The risk aversion is moving front end in case of a Grexit and forward premium are too high in case on a Grefix. Managing a European credit book was highly demanding and if you were just looking for a safe harbor, the attached grapple shows how IG single CDS spreads in the US have hardly moved over the week.