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Tighter And Compressed

01 April 2016 by lberuti

The above grapple shows the two major themes of the week in creditland: risk premia tightened and iTraxx Crossover (ITXEX) compressed relative to iTraxx Main (ITXEB). Chair Yellen’s dovish speech echoed in the market and another weekly rally capped an already impressively strong month of March (ITXEX closed at 305bps and ITXEB at 74bps). The compression trend is also the consequence of Central Banks’ action. In the past weeks, because investors thought the ECB corporate bonds buying programme announced on the March 10th would compress investment grade risk premia while high yield risk premia would remain driven by macro data which they expect to be mixed at best, ITXEB had meaningfully outperformed ITXEX. So much so that investors who had played that trend decided to book some profit on (part of) their positions, taking comfort from the basis which is at historically negative levels on ITXEB while it is not really the case on ITXEX.