07 October 2015 by lberuti
The relative value between iTraxx Main (ITXEB) and iTraxx Financials Senior (ITXES) is one of the most scrutinised spreads. For long periods of time, it has been an indicator of the stress experienced by the market, because of the exposure of banks, which represent more than half of ITXES, to peripheral risks in general and to Greece in particular. Investors have used that spread (buying protection on ITXES and selling protection on ITXEB) as a hedge against systemic risk, and that is evidenced by the DTCC statistics which point to that position growing in size consistently in the buy side community. Investors have been used to seeing the risk premium of ITXES trading wider than the risk premium of ITXEB. But with the recent wobbles in commodity related corporates and in car manufacturers, ITXEB has caught up with ITXES, and today ITXES closed tighter at 82.5bps than ITXEB at 83.5bps. If people begin to unwind their so called tail hedges, that could only be the beginning of ITXES outperformance.