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Curves And The Impending Roll

19 August 2014 by HCM

Curves have always had a directional element. Since the beginning of the summer, the market has experienced some bursts of volatility, but there was no real credit concerns in the universe of names encompassed by the investment grade indices and all risk premia have been range bound. This is typically an environment where curves steepen when the credit market widens and flatten when it tightens. This has been true over the last couple of months, but recently curves remain unchanged across the board despite the resumption of the tightening trend. This is due to the proximity of the September roll. When the market will move to a new series of “on the run” maturities, the roll down will be less aggressive on longer dated contracts. The price difference expressed in running basis points between a 9.75 year and a 10 year maturity contract is smaller than the difference between a 4.75 year and a 5 year contract.