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Collapse of the Crossover Roll

30 April 2014 by HCM

When the new series of indices were issued in March, the 5 year risk premium of the iTraxx Crossover series 21 (ITXEX21) was 70bps wider than the 5 year risk premium of the series 20 (ITXEX20). This spread is known as the “roll” between the 2 series. The new names which entered the series 21 (the number of constituents was extended from 50 to 60) were higher spread names, as they were picked among the less liquid European high yield population. Investors’ unabated appetite for risk over the last month has sent the risk premia of these names much tighter. If you add the effect of M&A activity (proven in the case of ALOFP (Alstom SA) or anticipated in the case of PFOURS (Play Finance)), it does not come as a surprise that the S20/S21 Crossover roll has been crushed, trading down to 47bps today. What is a bit more surprising is to see that the risk premium of the older series have actually increased over the same period. Maybe people realised that short dated protections should not be worthless, even if they represent far out of the money options.