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We Price Something They Don’t

06 October 2017 by lberuti

Except for a handful of special situations in the US and Catalonian banks, individual names have been rock solid throughout the week. The main theme for the week has been the broad-based performance of cash, with a preference for higher beta and duration products. New issues all performed well in this environment, and investors seemed to be more concerned about buying the dip than hedging. On the day, investment grade credits were unchanged on average in Europe and 0.5bps wider in the US, while high yield credits were tighter by 0.5bps in Europe and 1.5bps in the US. This price action was a bit at odd with what we saw on credit indices, especially in Europe. They suffered from a rise in volatility because of headlines saying North Korea would be ready to test missiles capable of reaching the US West Coast, and because of the uncertainty that still surrounds the situation in Catalonia. Ahead of what will be a 3-day week-end in the US, a few purchases of protection were made. They took credit indices off their tightest levels, and sent bases – the difference the traded values of indices and the theoretical values computed using the prices of their individual constituents – to higher levels across the board.