The iTraxx Crossover rallied more than 50 basis points last week, mirroring the rally in the U.S. stock markets which hit when the Federal Reserve raised interest rates 25 basis points the previous week. Officials say the Crossover tightening is a sign credit investors are recovering from the frenzy, triggered by volatile equities, which drove spreads to record wides in June.
The price of protection on the five-year Crossover closed at 259 bps Tuesday, 55 bps points tighter than a week before, as players flipped from buying to selling protection. "This is a significant move," said one trading official. "The speed in which the credit markets have reacted on the upside is remarkable." Most activity was at the five-year maturity.
The underlying credits in the index also rallied, with all but two of the 45 names closing in. These included German manufacturer Grohe which rallied to 667 bps from 800 bps in a week and British chemical company Ineos Group which tightened to 428 bps from 523 bps over the same period. "The vast majority has seen double digit tightening," said Kit Juckes, credit researcher at The Royal Bank of Scotland in London.
Another strategist predicted the rally will be short lived, however, because volatility remains rife on the back of key U.S. and European data releases. "I've never had to look at intra-day moves so closely before," the strategist said. On Wednesday, the Crossover had widened 12 basis points before lunch to 270-272 bps, in the lead up to Thursday's statement by European Central Bank President Jean-Claude Trichet and a U.S. jobs report Friday.