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Sitting On The Edge

26 May 2016 by lberuti

Credit markets have let the rally monkey out since the beginning of the week. Oil is closing on $50/barrel. A deal on Greece was conjured out of nowhere. And there is growing confidence that the US economy can weather another rate hike (after having priced the possibility that the US could enter into recession less than three months ago…). It is no wonder that a slight consolidation occurred today, but it was no more than that. All credit indices saw their risk premia closed tighter on the day, and iTraxx Main (ITXEB) and iTraxx Crossover (ITXEX) came close to support levels without breaking them though. Some investors are taking chips off the table, others are entering cautiously defensive strategies (like covered receivers where people buy protection and sell to someone the option to buy it back from them at wider levels), but no one is aggressively buying protection yet. If ITXEB and ITXEX break through 70bps and 300bps, it could be like trying to catch a falling knife.