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Could It Be Fund Flows?

27 November 2015 by lberuti

The ranges were once again fairly tight today on all credit indices and volumes were thin on a ground, as one would expect when most Americans are enjoying a long Thanksgiving week-end. And once again iTraxx Crossover (ITXEX) outperformed iTraxx Main. And once again the basis of ITXEX (the difference between its risk premium quoted value and its fair value computed using its constituents’ individual risk premia) was stuck at the recent lows. On Wednesday, HY Credit fund reported strong inflows for the sixth week running. At the same time, some individual corporates in the high yield space are experiencing some serious difficulties. Fund managers could well be selling protection on the diversified ITXEX to get exposure to the market until things calm down and they have more visibility regarding which names they should choose to invest their cash. Fund flows could go a long way towards explaining the deeply negative levels of the ITXEX basis.