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26 January 2018 by lberuti

Since the beginning of the year, credit indices have been trading in very narrow ranges. But while the market felt uneventful as a whole, the price action was different from one index to the other and both compression and decompression were at play. Most market participants lament about the lack of interest in buying protection on the highest quality credits. That indeed translated into a 2bps tightening of iTraxx Main (ITXEB) over the last month, even though late December’s risk premia’s levels were already considered as tight by many. At the same time, a number of iTraxx Crossover (ITXEX) constituents are having a very hard time rallying: GFKLDE (Garfunkel) and MTNLN (Matalan) are more than 150bps wider on that period, and credits belonging to the Altice sphere appear unable to move any tighter. Since last Christmas, using the 4 to 1 ratio favoured by the market to compare the 2 indices, ITXEX has underperformed ITXEB by 8bps. That is quite some decompression. In the financial universe, the tone has been very supportive. But in that space, the periphery has outperformed the core, and CDS referencing subordinated debts have outperformed CDS referencing senior debt, compounding the compression phenomenon.