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Europe/US Convergence

02 April 2014 by HCM

When the series 20 was the “on-the-run”, the spread between iTraxx Main in Europe and CDX IG in the US, the 2 investment grade benchmarks, was relatively stable with the exception of 2 episodes (the EM related mini crisis in January and the Ukraine risk escalation early March) during which Main underperformed CDX. Since the roll in March, there is a completely new dynamics and the convergence between the 2 benchmarks has been impressive. From 9bps on the 20th March, the spread is now down to 5bps. The outperformance of iTraxx Main is due to the tightening of the risk premium of banks (which are not represented in the CDX IG index) but also to the performance of the peripheral names. Europe is no longer perceived as much riskier than the US, and the basis (difference between the quoted risk premium of an index and its theoritcal risk premium implied by its constituents) is in line on both indices, when it has historically accounted for a good part of the spread.