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Concerns Over Valuations, Not Default

29 September 2014 by lberuti

Since the September roll, the credit market has somewhat been repriced and 5 year risk premia are wider across the board. Indeed, we can see that all the pin heads are pointing to the right. There had been all sorts of worries for some time (from geopolitical risks to the pace of the worldwide economic recovery), and the catalyst for them to translate into some negative price action was the news that Bill Gross changed ship and the redemptions it could trigger at Pimco. With that in mind, it is not surprising that curves have steepened since last Monday. The market is not predicting an acceleration of the defaults in the near future (nor does it predict such thing in the medium term actually). This would have triggered a bear flattening of the short end, raising the cost of insurance for short dated maturities. The market is just anticipating a tough few weeks/months ahead as money could be reallocated at the expense of what is currently one of the biggest credit portfolios.