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A European Brownian Bridge

17 August 2016 by pdonnat

Today, the iTraxx Europe Investment grade index and the iTraxx Europe Crossover index have both build a Brownian bridge over a one-year period. They were trading at 68bps and 314bps respectively the 14th of august last year, and they are closing at 68bps and 314bps tonight. An investor being long risk will have made money on his investment with the carry and the roll down. Financials indices bridge is still under construction. The senior index is 13bps wider and the subordinated is 42bps wider. You have to mind the gap on financials credits. Nevertheless, the 5 years forward average value of the Europe credit risks is back to where it was a year ago. We had a real random walk over the last year but we are back to the same levels. Compared to last year, the trend is different. The long term trend was on rising CDS premium, the recent dynamic is on CDS premium tightening. Today was for once a weaker session, financials leading the way wider, but post European market close the US market is trading better. Hard to say if we are on a turning point but at least we expect to comment next year on any European Brownian bridge.