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Imagine If Stocks Were Up

18 July 2017 by lberuti

When volumes are light and volatility is subdued, credit derivatives indices – and all Credit Default Swaps actually – tend to outperform. Indeed, investors hate to pay carry in a zero-interest-rate-no-default-world when there is no marked-to-market to protect. This theme clearly played out today. Despite European equities down roughly 1% and US equities in the red as well, credit indices closed tighter across the board – the odd one out was CDXHY which was 1bp wider at 324bps -. Concerns regarding the lack of progress of the US Republican healthcare bill which does not bode well for Tax or other fiscal reforms gripped stocks, but there was no one - yet - to buy CDS just because stocks were down. Disappointing results from ERICB ( Telefonaktiebolaget LM Ericsson ) – which sent its stock down almost 16% and its 5-year risk premium 12bps wider at 138bps – failed to trigger weakness in the telco sector – or any other sector! – and iTraxx Main protection was sold aggressively as soon as it approached 54bps, as some people are managing gamma negative option positions expiring tomorrow.