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The Roll Is Upon Us

19 September 2016 by lberuti

Tomorrow, all CDX and iTraxx indices except CDXHY will see new series issued. In Europe and Asia, series 26 will be launched, while series 27 will be launched in the US. The new “on the run” 5-year maturity will December 2021 for the next 6 months. Only minor changes will take place among index constituents. SSE Plc and Imperial Brands will replace RWE and Compass Group within iTraxx Main (ITXEB). Lufthansa, TUI, Nokia, Metsa and Unilabs will replace Alstom, Elis, UPM-Kymmene, Melia Hotels and British Airways within Itraxx Crossover (ITXEX). Energy Transfer Partners and ILFC will replace Gap and Time Warner Cable within CDXIG. The difference in risk premium between leavers and newcomers is minimal, so that the bulk of the impact of the roll on index risk premia will come from their maturity extension. If theoretical values are any guide, ITXEB Series 26 5 year should be 6bps wider than Series 25, ITXEX Series 26 5 year should be 14bps wider than Series 25, and CDXIG Series 27 5year should be 9bps wider than Series 26. Adding these amounts to Friday’s closes would have pushed credit index risk premia of the new series to levels last seen for “on the run” indices during the second half of June around the time of Brexit. Expecting yield starved investors to come and sell protection on the new credit indices first thing tomorrow morning, dealers have pre-emptively shaved a few basis points on all of them by driving current series of indices tighter across the board today.