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Contradicting Forces

05 September 2017 by lberuti

Today’s session illustrates the schizophrenic state of the credit market. On the one hand, the situation in North Korea is showing no sign of easing. The U.N. Security Council held an emergency meeting and American Ambassador Nikki Haley said North Korean leader Kim Jong Un is "begging for war." It was then no surprise that US investors were in a risk off mood when they came back from their long week-end, and the 2bps widening of CDX IG’s risk premium was to be expected. On the other hand, the next CDS roll which will mark the launch of new credit index series (28 in Europe and 29 in the US) and the introduction of new “on-the-run” single reference contracts (bearing a December 2022 maturity rather than the current June 2022 “on-the-run” maturity) is only a couple of weeks away. It undoubtedly biased investors towards getting rid of June 2022 protection in any weakness before potentially replacing them with December 2022 at a later stage. It was the case in Europe, which, after widening yesterday while the US were shut, found it very difficult to take it further today and closed the session unchanged.