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Tight Spreads And Negative Bases?

21 November 2014 by lberuti

You can forget all that has been said and written over the last week! No more weakness, no more decompression. Today, risk premia of credit indices tightened almost in a straight line from the word “go”. The snap back was triggered by the announcement of China easing, but it really started to get legs once Mr Draghi didactically explained the benefits of a broader asset purchase program during a speech delivered to a crowd of German bankers, after saying that the ECB has reached the lower bound on interest rates. The rally monkey was out of the bag and indices (once you factor in the effect of the rolls) effectively traded at their tightest levels of the year. Unsurprisingly in such a violent move, indices have moved further than single names and bases to theoretical values are deeply negative, particularly in iTraxx Crossover. People have been questioning how such a situation can persist in a lower spread environment. But the last few weeks have shown that dispersion is back with a vengeance and will probably not go away (not just yet anyway) on the back of central bankers’ speech, irrespective of how determined to act they can sound. That is the real driver of bases.