10 September 2014 by HCM
Since the sovereign crisis which affected Europe, iTraxx Main has consistently traded wider than CDX IG. That was traditionally explained by the inclusion of banking institutions in iTraxx Main, while there is none in CDX IG. The spread between the 2 indices was as wide as 60bps at the end of 2011. The convergence has been a gradual process ever since as the crisis abated, and as the market rerated banks’ risk premia on the back of it. That said, whenever the market was under a bit of stress, iTraxx Main has been underperforming CDX IG, as banks were still moving with a beta higher than 1. Since the beginning of the week, this relationship did not hold. For the first time in a very long while, European investment grade credit has outperformed its US equivalent during a risk off move. But the normalisation will only be complete when the implied volatility of iTraxx options will be in line with that of CDX options, and no longer trades at a premium. iTraxx options are still 10% more expensive, which means that the market still perceive a greater risk in Europe than in the US.