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Bull Flattening? A Bit, But Not Much

06 May 2014 by HCM

Since the roll, the performance of credit has been almost uninterrupted. 5 year risk premia have tightened in a straight line and are now 13% lower than they were on the 20th March. In such an environment, one would expect CDS curves to flatten, as the different maturities usually move homothetically. But the current low default environment which has been prevailing for quite a while is not enticing investors to buy short dated protection. CDS with a maturity of up to 3 year have not found any takers in the recent move and curves are very steep across the board. 3 year risk premia have decreased by 18% since the roll. On a number of names, the move tighter combined with steep curves now makes short dated protection a compelling option to smooth the volatility of any portfolio if the market were to follow a bumpier path in the future.