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The (Bearish) Roll That Was

20 September 2016 by lberuti

Risk traded sideways across most asset classes today. Both Equities and rates were broadly unchanged ahead of the Bank of Japan and Fed meetings tomorrow. It was then all the more surprising to see that the CDS roll was quite bearish in Europe. On roll days, the maturity of “on the run” contracts is extended by 6 months, but usually, when markets are not under stress, only a portion of the expected related risk premium increase is reflected in the price. This is effectively what happened on iTraxx Crossover and in the US. It was a different story for European investment grade names, particularly in the financial sector. The fair value of iTraxx Financials Senior - respectively Subordinated - Series 25 (ITXES25 - respectively ITXEU25) for the 5 year point was 1.5bps - respectively 4bps - wider while one would have expected it to be roughly 2 to 3bps - respectively 3 to 4bps - tighter. The weakness was driven by DB and MONTE. The market seems to gradually factor in the fact that the worst cannot be completely ruled out as far as they are concerned.