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To Good to Be True

22 August 2018 by pdonnat

The credit index market is priced to perfection. The investment grade (IG) indices, in the US and in Europe, are trading close to their fair values. In Europe, Atlantia CDS is trading 25bps tighter and all the European CDS are trading better. Europe is closing the gap with the US. The normalization is underway. However, having the US IG credit index trading close to its fair value is more unusual. The US credit index is usually trading with a premium, the index trading much tighter than its fair value. The US equity indices – Russel 2000 included - are hovering below their highest level ever. The credit indices are far from trading at their tightest levels. Looking at the index bases (how far the indices are trading from their fair values) and looking at the index absolute levels, the credit market is definitively not enjoying the equity market strength.