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The Rise And Fall Of Dispersion

06 October 2016 by lberuti

Since the beginning of the year, there has been a significant rebound in commodity prices, and particularly in oil. From a low of $35 per barrel in January, WTI is now trading at $50 and has been trading above $45 – bar a fortnight spell at the end of July – since mid-April. Unsurprisingly, the risk premia of energy related names have benefitted from this rebound in prices. Over the last 6 months, the average 5-year risk premium of the names that compose the energy subset of CDXIG has tightened by more than 120bps to roughly 160bps. While people were scrambling to buy protection on these names earlier in the year, the situation has normalised to a large extent. If energy is still the widest sector in CDXIG, it has been brought back in check and the imbalance between buyers and sellers has largely disappeared. The dispersion among constituents of CDXIG have decreased and so has the basis (difference between the quoted value of an index and the theoretical value computed using the individual prices of its constituents) of CDXIG. From highly stressed levels in April - CDXIG26 was almost 75cts expensive compared to its fair value -, the basis of CDXIG26 is now worth less than 10cts, not even enough to lure arbitrageurs into trying to capture it.