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Scared By The Roll

06 March 2018 by lberuti

While credit indices in Europe felt relatively healthy and traded tighter across the board, it was a different story in the US. Despite a positive start after an evident lack of support for tariffs within Trump’s administration and Congress, CDX IG - the US investment grade benchmark – trended back to unchanged levels. Investors are still worried by the current valuations as a whole and by the recent spell of volatility, but, at a micro level, technicals appear to push risk premia in the opposite direction. The roll is only a fortnight away, and people are wary of owning CDS contracts referencing single name entities maturing in December 2022, aka “5-year CDS”. These contracts will lose their “on-the-run” status and their liquidity will be impaired when June 2023 becomes the new reference maturity for CDS. That is probably the reason why hardly any Dec22 CDS were quoted wider today. Even CVS ( CVS Health Corp ) which launched a $45Bln 9-tranch bond offering saw its Dec22 risk premium tighten. So much so that the basis of CDX IG – the difference between the quoted value of an index and the theoretical one computed using the values of its individual constituents - was back into positive territory – up 7.5cts (or 1.6bps) on the day - , also helped by the tightening of PBI ( Pitney Bowes Inc ) – by 54bps to 292bps - and JWN (Nordstrom, Inc) – by 23bps to 294bps - which respectively announced they had “concluded that an outright sale of the company (was) not in the long term interests of the shareholders” and that they rejected a go-private offer.