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It Is The Investment Grade Corporates, Stupid!

01 October 2018 by lberuti

Recently much had been said about Italy after they unveiled plans for a substantial budget deficit last week. Consequently, Mr Tria was greeted with little enthusiasm from his European colleagues and the market alike. The yield differential between the interest rates Italy and Germany have to pay to finance themselves over 10 years reached 283bps today. Unsurprisingly Italian financials reacted poorly and generally speaking iTraxx Financials has been under pressure. Consistently, iTraxx Financials Subordinated (+10.5bps over the last week) has underfperformed iTraxx Financials Senior (+4.5bps). What surprised some is the fact that despite the underperformance of its financial constituents, iTraxx Main (ITXEB) is 2.5bps tighter on a one-week horizon and that it has outperformed massively iTraxx Crossover which is 2bps wider. The bottom line is that no one feels the need to buy protection on investment grade corporates in the current environment. What is true in Europe is also obvious in the US. People who are scratching their heads when they look at the relentless tightening of ITXEB should take a look at CDX IG which does not include any bank. During the last five trading sessions, the risk premium of the US investment grade credit benchmark has tightened by 5bps to 58bps, outperforming ITXEB by 2.5bps.