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Are Indices Getting Ahead of Themselves?

26 August 2014 by HCM

The credit market was closed yesterday for the most part and it had to play catch-up with other risky assets. The market now seems to be pricing a higher probability of QE taking place sooner rather than later following the dovish comments from Mr Draghi at Jackson Hole last Friday. It led to a very strong session for credit indices, particularly iTraxx Crossover which closed 18bps tighter. In a typical fashion, single names enjoyed a positive session as well, but at a far more moderate pace. The difference of velocity was such that the basis between the index and its fair value is flat, down from 50cts on Friday, and in any case quite far from its typical 40cts value. The recent price action makes buying protection on iTraxx Crossover a dangerous exercise, such was the bullish sentiment over the last 3 weeks. But if at the same time you can sell protection on its single name constituents for the same price, the probability of owning a winning trade looks very high.