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Which One Should Be On Top?

11 October 2017 by lberuti

When they were issued on the 20th September, iTraxx Main Series 28 (ITXEB28) and CDX IG Series 29, the investment grade credit benchmark indices in Europe and in the US respectively, traded at the same level. Back then, the fair value – i.e. the risk premium of an index computed using the individual prices of its constituents – of ITXEB28 was already 3bps tighter than the fair value of CDXIG29. The difference between these fair values has been very stable over the past 3 weeks. It has not prevented the spread between ITXEB28 and CDXIG29 to move around. This spread has been a barometer of investors’ concern regarding the political situation in Spain. It moved between -1bp (ITXEB28 tighter than CDXIG29) when the referendum was not certain to be held, to +3bps after the violence that marred the vote held in Catalonia. Yesterday’s speech by Mr Puigdemont was interpreted by the market as a sign of easing. Even though it was not clear whether Catalonia’s independence had been declared or not, it was deemed reassuring enough to bring ITXEB28 and CDXIG29 at the same level.