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Boring Credit… Or Not?

06 February 2018 by lberuti

It might not strike you when you look at the daily changes of the different credit indices, but the session was incredibly volatile. The end result is some compression in Europe between iTraxx Main (ITXEB) and iTraxx Crossover (ITXEX) on the one hand, and some outperformance of ITXEB compared with CDX IG in the US. That does not tell the whole story though. If ITXEX is closing 4bps wider at 255bps, its total variation (ie the sum of the successive moves wider and tighter during the day) was well in excess of 60bps, or more than 25% of its risk premium. All that took place in very healthy volumes on indices, but activity on single reference CDS was more muted. The price action on cash products has been well behaved, and no one is desperately trying to liquidate portfolios of bonds, as opposed to what we see on equities where there appears to be some forced deleverage. There is no need yet to aggressively buy protection on single names. Credit indices theoretical risk premia are not moving that much, and despite the intraday volatility, daily variations are a bit tame when compared to other risky assets.