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Taking Chips Off the Table

11 August 2017 by pdonnat

The investment grade credit indices are closing the week 5 bps and 4 bps wider at 57 bps and 61 bps respectively in Europe and in the US. This same week, the Korea Sovereign CDS is closing only 10 bps wider at 70 bps. However, we should note that the Korea CDS widening started at the end of 2016 while it was trading around 40 bps while the European and US benchmarks were both trading at 70 bps. Nevertheless, the current spike in Korea CDS is moderate considering what is at stake for the peninsula. It has traded as wide as 80 bps early 2016. Using DataGrapple, and selecting the whole-time series from 2006 up to now, the weekly move is more a tempest in a teapot. Investors have not rushed to hedge Asian credit risks, they just used the Korean crisis as an excuse to take chips off the table. Therefore, there is room for more decompression of the Korean CDS versus the investment grade indices.
Regarding today’s session, the credit index market was again very active. After a weak open on credit indices - the European credit index trading as wide as 59.25 bps - the index rallied sharply in the afternoon - trading as tight as 56.65 bps -. Everyone is expecting a little common sense and goodwill from all parties over the weekend.