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Reality Check In Creditland

04 November 2015 by lberuti

After a run of a few days with bases (ie the difference between the quoted value of credit indice and their theoretical value computed from the prices of their individual constituents) at extreme negative levels (the risk premia of indices is lower than their theoretical risk premia), we eventually had a correction today. On the one hand, credit indices stabilised (despite a very strong start which was later thwarted by Mrs Yellen’s comments who once again pointed to a December hike), and on the other hand there was a broad based repricing of single names risk premia. For instance, this reality check (risk premia had been maintained artificially wide in thin trading) brought the fair value of iTraxx Crossover 6.7bps tighter while the index closed 4bps wider. This sound price action does not necessarily mean the market is ripe for a correction as, during the recent rally, it never really felt like investors holding short risk positions capitulated, but at least risk will change hands more easily.