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Is Decompression There To Stay?

10 October 2014 by lberuti

Generally speaking credit has been very resilient recently in the face of equity weakness. While the S&P is down 3% since the beginning of the week and the Eurostoxx down 4%, CDX IG S23 and iTraxx Main S22 are only 1bp wider since their launch, i.e. over the same period. But today for the first time, the higher yielding names were notably more impacted than the rest of the credit market. iTraxx Financial Sub underperformed iTraxx Financial Senior, and iTraxx Crossover underperformed iTraxx Main. Decompression is a theme that has been advocated by many in a more uncertain environment. We shall see whether it is there to persist, as Crossover Tranches will soon be introduced by the dealer community on the series 22, which offers a diversified and rather yieldy portfolio. That could attract investors as it will provide them with a leveraged investment and could put a cap on the iTraxx Crossover index risk premium.