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The Roll Is Upon Us

12 December 2013 by HCM

All the ingredients were there today for the single name CDS to experience a bit of widening. The close of the US markets were weak and gave some early momentum to the different credit indices, and bearish equity markets kept that impetus throughout the day. But we are now close to a very technical period for single name CDS, the quarterly roll. Every time we approach this date, investors become much more reluctant to buy protection: the current 5 year CDS will soon no longer be the “on-the-run”, and will no longer be the most liquid maturity. Market participants even take advantage of every move wider in spreads to take some of their short risk positions off, and sell (part of) the 5 year CDS positions they own. They will reload protection once the “new” 5 year will be actively trade, ie on the 20th December.
That is probably the main reason behind the stability of almost every single name today despite the move wider in credit indices. Today, most of the moves in indices were down to the change in the index bases, the difference between their fair value and their traded level.