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Unmovable

25 October 2017 by lberuti

Since the day the new series of indices were launched on the 20th September 2017, the quoted value of the roll between series 28 and series 29 of CDX IG has been very stable. The risk premium differential you have to pay to move a position from series 28 to the now more liquid series 29 has traded between 2.5bps and 3.25bps. That difference in risk premium comes from the different maturities of the series (dec22 for series 29 and jun22 for series 28) and from the composition discrepancies between the series. If one can reasonably assume that the portion of the roll compensating for the 6-month maturity extension has not moved much during the past 5 weeks, the same cannot be said for the portion corresponding to the composition mismatches. TSO (Andeavor) and RCL (Royal Carribean Cruises) are in series 29, and, since the 20th September, their combined risk premium tightened by 22bps. SPLS (Staples) and NBR (Nabors Industries) are in series 28 and, during the same period, their combined risk premium increased by 240bps. The CDX IG roll was first quoted at 2.75bps and closed today at 2.75bps, while its fair value – ie the value computed using the prices of the individual constituents of each index – has gone from 3.9bps to 1.6bps tonight. If you want to buy protection on SPLS and NBR, do not bother trading single name CDS. It is cheaper to simply sell the CDX IG roll!