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Reallocation

27 March 2017 by lberuti

Credit never really felt vulnerable today. Despite a wider open - iTraxx Main (ITXEB) +1.5bps @ 76.5bps and iTraxx Crossover (ITXEX) +8bps @ 300bps - on the back of doubts surrounding Mr Trump’s ability to push through his reform agenda following the health care bill fiasco, the price action was strong from start to finish. Sellers of protection emerged early on, as some investors were eager to use these better entry points to get rid of hedges or add risk, and credit outperformed equities throughout the session. Volumes were not massive, but reallocations appear under way. Risk was transferred from US into European credit in the ETF space, which translated into a 1bp underperformance of CDX IG compared with ITXEB and a 5bps underperformance of CDX HY compared with ITXEX. The probability that the Federal Reserve will raise rates two more times this year has dropped back below 50%. That is quite supportive for IG credit, and forced another round of bullish decompression. Financials are still trading very firm, despite some questions asked about UK banks as Article 50 is about to be triggered, and the spread between ITXEB and iTraxx Financials is down to 13bps – 75bps vs 88bps -, the tightest it has been in almost a year.