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Zeroing In On Zero

31 January 2018 by lberuti

The broader credit market appears to be completely immune to the volatility that has affected some risky assets after the recent upwards trajectory of interest rates in the US and in Europe (the US and German 10Y yield are up roughly 30bps since the beginning of the year at 2.73% and 0.70% respectively). After a session of widening yesterday, credit indices could not help to retrace the best part of that move and were back in the middle of the range in which they have been stuck since the beginning of the year. But it does not mean that nothing goes on in the CDS market. Today the most spectacular action took place in the US, where two constituents of the CDX IG series 29 saw their risk premia tighten aggressively. XRX’s ( Xerox Corp ) 5-year CDS traded 59bps tighter at 78bps, after the company announced it will merge with a joint venture it operates with Fujifilm in Asia, marking the end of independence for a US company that became synonymous with office copy machines. PBI’s ( Pitney Bowes Inc ) 5-year CDS closed 81bps tighter at 366bps after the company released results that beat analysts’ expectations. The outperformance of these two credits was such that despite seeing its risk premium tighten by 0.5bps, CDXIG was outpaced by its theoretical value - computed using the individual risk premia of its constituents – and its basis closed almost flat. That is the smallest spread between CDXIG series 29 and its fair value since it was launched last September.