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Crossover Rolls Are Marching Steeper

20 November 2014 by lberuti

Much has been said recently about decompression. On the one hand, higher quality names are well behaved and their risk premia are tight by most standards. One exception today though was Technip which saw its 5 year CDS widened by 20bps following their €1.47bln bid for Compagnie Generale de Geophysique (CGG), which proves that investment grade corporates are not immune from headline risk. On the other hand, the most leveraged companies have undergone some serious examination recently and the market has punished every misstep. Almost every day there are a handful of names which see their bonds battered. Today’s losers were Towergate, Hema, Bormioli and Loxam to name a few (losing respectively 10pts, 5pts, 5pts and 3pts), while for once CGG provided a rare bright spot (bonds up 12pts). It has naturally translated into an underperformance of iTraxx Crossover compared with iTraxx Main in Europe over the last week (and the same happened in the US where CDX HY underperformed CDX IG), but it has also led to a substantial steepening of the rolls between the iTraxx Crossover S22 and all the off the run series. Indeed, iTraxx Crossover S22 is the index which include the most genuine high yield companies, which was a direct effect of the expansion of the basket from 50 to 60 and then 75 names. For instance, the S21/S22 roll has traded up from 117bps last Thursday to 129 at the close of business today.