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The Great Convergence

04 September 2014 by HCM

The ECB did not disappoint the market today. It delivered what people had been hoping for, i.e. a European version of QE, centred on ABS and covered bond purchases. Details will not be known until the 2nd of Oct, but Mr Draghi indicated that the ECB intends to increase the size of its balance sheet roughly to 2012 levels. TLTRO and assets purchase added together should just be shy of a billion euros. The ECB actually delivered even more, in the form of an unexpected rate decrease. The credit market celebrated these announcements in style, and iTraxx Main ended the day 2bps tighter at 56bps, which is the tightest closing level of the year. The major take away from the session is that now all investment grade indices are traded flat to each other. With Central Banks in action of both sides of the Atlantic (even though at different phases of their liquidity injection program), it is not surprising to see risk premia converge in the US and in Europe. ITraxx Main and CDX IG are now trading flat to each other, and in Europe iTraxx Financial Senior is almost flat to iTraxx Main.