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Too Much Italian Risk Priced In?

21 February 2018 by lberuti

Today was option expiry. Despite all the promises of volatility and exacerbated moves as large negative gamma positions were supposedly open at strikes close to current levels on most indices, the market did not live up to the hype. After a weak open, all credit indices trended tighter towards their closing levels without any acceleration at any point. The main takeaway from the session is that the recent underperformance of iTraxx Europe (ITXEB) compared with CDX IG appears to have stalled. Over the last few sessions, investors bought protection on peripheral financial institutions in a bid to protect themselves against any adverse outcome of the Italian elections on the 4th March. That pushed iTraxx Financial Senior (ITXES) to trade a couple of basis points wider than ITXEB while it was trading 1bp tighter 10 days ago. It created a bearish sentiment in Europe where ITXEB traded sideways while CDX IG moved away from its widest levels. ITXEB underperformed CDXIG by 8bps since the 9th February. Both indices traded flat to each other yesterday, which, at least temporarily, seems to mark the end of that trend. Tonight, CDXIG closed at 54bps, 2bps wider than ITXEB.