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An Arbitragers’ Fest

14 November 2016 by lberuti

Credit and stocks were on 2 very different trajectories today. Equities have outperformed bonds since Donald Trump was announced as the 45th president of the United States, on speculation his pledge to spend more on infrastructure will trigger interest rate hikes amid a pick-up in growth and inflation. We had more of the same in the morning, and while stocks were up more than 1%, credit indices were under big pressure from buyers of protection eager to protect portfolios of bonds - particularly iTraxx Crossover (ITXEX) – who prevented them from tightening and even pushed them wider. At the same time some specific news pushed a few individual credits tighter, and in certain cases much tighter. For instance, Intrum Justitia, the Swedish debt collecting company, announced they are buying Lindorff AB, one of their Norwegian competitor. In the process, Lindorff’s debt will be refinanced and CDS referencing LINDOR (Lock Lower Holding AS), the issuer of their current debt, will most likely become orphaned. It triggered an almost 450bps tightening of LINDOR’s. It pushed the basis of ITXEX into positive territory, and arbitragers rushed to unwind some of the positions which were accumulated over the last 12 months during which indices have traded chronically rich to their fair values.