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Tighter Now, But Not Tomorrow

13 March 2018 by lberuti

It was really obvious over the last few sessions, but even over the last few weeks it has become more and more difficult to source decent bids on 5-year CDS referencing single names. The combination of a benign calendar in terms of risk event and the coming roll has made dealers very reluctant to buy protection maturing on or before December 2022. The maturity of “on-the-run” CDS contracts (read the most liquid) will only be extended by six months to June 2023 next Tuesday, when the roll officially takes place and when new series of indices are issued, but the value of December 2022 contracts has already been impaired and they already have rolled down the curve. Longer dated protection is not really affected by this phenomenon, and remain bid as uncertainty over what the future keeps in store on the medium term is certainly here to stay. That is obvious when one looks at curves. If you consider the investment grade universe in the US and in Europe over the last month, while the risk premia of December 2022 CDS contracts have tightened, the additional premium one has to pay to extend a contract maturity to December 2027 has increased. In other words, while the risk premia of December 2022 CDS contracts have tightened, the risk premia of contracts protecting you against a default for a 5-year period but which would start in 5-year time has not changed.