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Increased Dispersion

03 November 2014 by lberuti

During the month of October, the credit market has experienced some wild swings. A leg wider mid-October, as questions were asked regarding the strength of the recovery, followed by a central banks inspired rally left risk premia almost unchanged on average, both in investment grade and high yield. But that masks some sector divergence and an increase dispersion, which is best evidenced by the persistently negative basis (i.e. the risk premium paid on an index is less than the sum of the risk premia paid on its constituents) for both iTraxx Main in Europe and CDX IG in the US. While you can see on this grapple representing US investment grade credits that the moves have been somewhat wilder over the last 4 weeks than they were since the beginning of the year, you can also see that the energy sector has massively underperformed all the others. It is the only subset of the CDX IG which closed the month of October wider, despite a 50% widening of its risk premium in September already. In little more than 8 weeks, the average 5 year CDS spread of the energy sector in the US has gone from 76bps to 126bps. The equivalent grapple in Europe paints a similar picture, showing that a 15% drop in crude prices has not gone unnoticed in creditland.