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Index Velocity

15 December 2014 by lberuti

After threatening to rally in the morning, risk sentiment took another dive today. iTraxx Main (respectively iTraxx Crossover) traded actively between 64 and 66bps (resp. 355 and 360bps) for the first 6 hours before selling off in style, and trading up to the widest level of the day of 70bps (resp. 380bps) where it eventually closed. This large move was done in low volumes. In a typical fashion during these market accelerations, individual constituents of the indices participated in the selloff, but to a much lesser extent. The basis between all the European indices and their theoretical values stands now in positive territory. After almost a week of uninterrupted widening, bases have even reached levels which begin to appear a bit stretched particularly on iTraxx Crossover where it is worth 60cts at the close. That is the equivalent of more than 13bps for a 5 year index, or 4% of the index risk premium. As you can observe on the Grapple, this is the first time since the launch of the current series at the beginning of October that we are in such a market configuration. Unless there is a quick snap back, it could signal the return to a more normal regime (the one which prevailed throughout 2014 until October) where indices are an hedging tool and not an investment product.