02 October 2014 by lberuti
Over the last week or so, we have seen some compression in indices, especially between iTraxx Main (ITXEB) and iTraxx Crossover (ITXEX). That is what one would expect during moves wider, but not really during moves wider. We had both recently, and in almost all cases ITXEX outperformed ITXEB on a beta adjusted basis. During the last 5 trading sessions, ITXEB widened 3.5bps compared with a 7bps widening of ITXEX. What is the most striking is the basis between these indices and their theoretical values. On ITXEB, it stands at 20cts, which is typical of a defensive investors’ mood. But on ITXEX, it stands at 10cts, when one would expect a reading comfortably above 50cts during a day where equities lost in the region of 2%. It seems that investors’ positioning has been fairly defensive throughout the summer, and that they think ITXEX will no longer do a good job at protecting their portfolio in its current form. They are selling the protection on series 21 they bought earlier in the year, and are waiting to reposition themselves on series 22. The new series that will start trading next Monday will certainly be closer to their portfolio as it will include more high yield names and will be more diversified, but it is always a risky game to leg your roll.