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Catching A Falling Knife

01 November 2017 by lberuti

The violent move tighter that we witnessed on European credit indices slowed a little today. They were tighter across the board, but the daily variations were fairly minimal after they began to leak wider in the afternoon. The same could not be said for single name reference entities though, and more specifically financial reference entities. They all saw their risk premia continue to collapse. With part of continental Europe closed, volumes were not sky high, but there was a proper sense of capitulation among investors holding protection. As one of the CDS market makers put it, the tone was “hideously strong”. The risk premia of Italian banks led the way – they are still riding the wave of Italy’s rating upgrade by S&P last Friday - and bids for protection on the whole peripheral sector were hit aggressively. But the most striking feature is coming from the core high quality names: they are back to levels last seen in 2007. The 5-year risk premia of HSBC, Allianz, ING and UBS are now all trading below 18bps.