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The End Of Stress?

08 March 2016 by lberuti

Since October last year, the credit quality of commodity related companies have been seriously questioned. It has been a worldwide phenomenon. In the US, the energy sector has been particularly affected, and with a barrel trading sub $30, the likes of DVN (Devon Energy Corporation), NBR (Nabors Industries Inc), WFT (Weatherford International Ltd) saw their risk premia go through the roof and trade in points upfront. The same was true for TCKBCN (Teck Resources Ltd) or FCX (Freeport-McMoRan Inc). The need for protection on these names was deep and for a couple of months, their CDS have moved much faster than did CDXIG, the index to which they belong. That pushed the basis (difference the quoted value of an index and the value computed from the prices of its individual constituents) to unprecedented negative levels. But since the beginning of February, commodities have sort of stabilised. Combined with the fast approaching roll (the date at which the standard 5 year maturity will be extended), it has dampened investors’ appetite for single reference entity protection maturing in December 2020. So much so that the basis which was worth 90cts on CDXIG24 5 years six weeks ago is now back to the 20cts area, where it belonged for the best part of 2015.