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One Day Does Not Tell The Whole Story

30 September 2014 by lberuti

Risky assets decided to close the month on a positive note, and credit was no exception. All indices closed tighter on the day, caught in a wave of short covering. But that does not tell the story of the month. Since investors came back from holidays, the credit component of their portfolio has not fared well. Everything is wider on both side of the Atlantic, from investment grade to high yield. Decompression was quite obvious, as expected in a bearish environment, and iTraxx Crossover underperformed iTraxx Main on a beta adjusted basis, while CDX HY underperformed CDX IG. The other salient fact is the underperformance of US indices compared with their European counterparts. CDX HY has trended wider than iTraxx Crossover all year long, and is now trading 100bps wider. This is a further sign of decompression, as there are very few distressed names in iTraxx Crossover as opposed to CDX HY which includes the likes Radioshack (RSH), Sears (SHLD), Caesars (HET) and Toys R us (TOY) to name a few. The gap will be much narrower with the next series of indices as iTraxx Crossover S22 will be expanded into real high yield territory. In September, CDX IG also underperformed massively iTraxx Main. The former does not have the support of Pimco at the moment, while the latter benefits from the support of the ECB.