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If The Market Were An Animal...

12 September 2016 by lberuti

The credit market has very often been said to be at the forefront of financial innovation, but sometimes one can reasonably wonder whether if it is not behaving like a creature from the past. Last Friday, after the ECB left the market disappointed, credit indices were quick to react and they all reached the wider end of their recent range. In a fairly typical fashion, their constituents were far slower to get moving. They began to reprice, but less aggressively. The full extent of the move was only felt in earnest today, and all index constituents were marked meaningfully wider. The bases (difference between the quoted value of an index and the theoretical value computed with the price of its constituents), which turned positive across the board at the end of last week, were back to much flatter levels today at the close. The credit market is a diplodocus. Once its tail (the indices) is beaten, it takes some time before the information gets to its brain. It is only later that its body (the single names) starts moving. Meanwhile, the broader started on the back foot in Europe after the very poor close in the US on Friday. iTraxx Main and iTraxx Crossover reached wides of 72bps (+4bps) and 335bps (+15bps), but that move was faded later in the day and they settled at 70bps and 326bps. The protection selling mainly came from people holding short risk positions booking profit. The market now feels long risk, and most of the shorts have now booked profit. The million-dollar question is now whether CTA momentum strategies start to de-risk. If they do, very few people will stand up and take the other side of the trade.