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Compression Explained

10 February 2016 by lberuti

Like every Wednesday, DTCC have released their weekly statistics regarding clients’ positioning in credit indices. Clients are now short risk on Financials like never before over the last couple of years. As of Friday, on the most recent 3 series of iTraxx Financials Senior, they were holding a net short risk position of $9.7bln, up from $8.0bln the previous week. That caution towards banks also translated into a reduction of clients’ long risk position on iTraxx Main (ITXEB) by $10bln, even though they are still long risk a healthy $19.3bln on this index. By comparison, long risk positions on iTraxx Crossover (ITXEX) were only reduced by $400m to $2.7bln. That probably explains to some extent the compression that we have seen last week, as many observers noted the relative underperformance of ITXEB (+28bps on the week from 94bps to 122bps) compared to ITXEX (+89bps from 370bps to 459bps) using the standard ratio of 4.