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More Dispersion

06 November 2014 by lberuti

In the recent past, some sectors have been put under severe pressure, in Europe and in the US. The pain felt a bit more acute in the US where the consumer retail and the energy sectors have provided some notable under-performers. Today the dispersion increased some more, when GNW (Genworth Financial Inc) tumbled after announcing a record loss. Its stock fell more than 35% and its 5 year risk premium doubled, reaching 315bps. The third quarter results painted a grim picture about its long-term care business, and the CEO declared that "the turnaround in this business will be more difficult and prolonged". The credibility of the management appears seriously damaged and investors punished the company. It is no wonder then that the basis of the CDX IG (the difference between the quoted value of the index and the theoretical value derived from the levels of its individual constituents) has been consistently negative (i.e. the risk premium of the index is tighter than its theoretical value) recently. Investors who want long risk exposure keep selling CDX IG (a diversified portfolio which trades in big size with tight bid/offer spreads) and fight at the same time to buy CDS on the riskier names.