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What Did Corporate America Miss Overnight?

20 September 2017 by lberuti

Today was the day market participants extended the maturity of what are dubbed “on-the-run” contracts, which concentrate most of the liquidity. During this roll, the maturity of 5-year CDS was pushed by 6 months, from June 2022 to December 2022. The longer the maturity, the higher the risk premium. As a rule of thumb, in the investment grade universe, 6 months are worth 10 to 15%. For 2 diversified indices, you would expect a 6-month extension in the region of 12%. Looking at iTraxx Main in Europe and CDX IG in the US offers 2 very different results though. In the US, market participants were fairly rational and the “on-the-run” 5-year risk premia of CDX IG constituents which were worth 52bps on average yesterday were worth 59bps tonight. According to them, Corporate America had not changed overnight. In Europe, the average risk premium of iTraxx Main constituents went from 49.5bps yesterday to 53bps tonight. Some 3.5bps went missing and risk premia effectively tightened by roughly 3bps. According to market participants, European corporations are in much better shape today than they were yesterday.