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Contradicting Forces

07 March 2017 by lberuti

The session felt weak from the word “go” this morning. There was an obvious need for some credit index protection, which might be explained by the recent heavy bond issuance and by the outflows that have been reported in US HY - $500mln last week -. It was met on the one hand by single reference CDS offer resulting from CLN issuance – especially in the financial sector – and on the other hand by banks still eager to offload protection maturing in December 2021 which soon will no longer be on the run - in a couple of weeks June 2022 will be the standard 5-year maturity -. With a little help from arbitragers, it resulted in enough index protection to cap the widening and at the end of the day moves were contained. These technical specificities have helped the market over the past few weeks, but soon banks’ books will be clean and arbitragers’ appetite for credit index bases at current levels will be satiated. With a rate hike in the US fully priced in March but more to come, with concerns rising about Draghi’s tapering agenda, credit indices might not be that well behaved in the future.