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Could Christmas Be Cancelled?

12 December 2014 by lberuti

What difference a week can make! 5 days ago, the only question worth asking was whether iTraxx Main would break the 50bps level before or after the New Year. Nobody thought of questioning the ability of the central banks to compress yields, and everybody associated that with tighter spreads. Since then we had the much talked about oil rout (hitting new lows today, again) and its consequences on emerging markets and Russia, and of course Greece and the possibility that Syriza could come to power in February. All this was enough to weaken somewhat investors’ conviction and some felt the need to take some chips off the table. If interest rates continued their good run during this “flight to quality” and reached historically low levels, the performance of equities and credit deteriorated throughout the week. As far as credit indices were concerned, the move was gradual in the first place as options’ gamma hedging activity provided the market with a supply of protection. But that source dried up today, and risk premia popped wider across the board. iTraxx Main is back to where it was early November, so the damage there is still contained. But in the US, CDX already suffered late November from its bigger inclusion of the energy sector, and it is closing on its widest levels of the year. Another such week and Christmas is in danger of being cancelled for investors in US credit.