The price of protection on the European iTraxx Crossover index fell last week, after an equity market rally fed market confidence through to the credit sector and pushed spreads on the index tighter. It drew in more than 10 basis points, to 296 bps on Thursday from 309 bps the week before. "Negative sales numbers released by the U.S. autos on Tuesday did not increase volatility in equity and this showed in CDS spreads," said one trader, adding, "Credit has certainly been more closely linked to the equity markets recently."
The draw-in surprised many CDS players and as a result people who were long the Crossover sold positions, traders noted. "People thought if spreads are not going to widen now they never will, so turned to short covering," said one official. "The emphasis is definitely on shorting," agreed another trader. Five-year trades were the most popular, but there was also activity at seven-year, said one trader at a European house. "This has come from structured dealers reorganizing after tightening and playing single names versus the index basis," he said.
Market officials agreed that the tightening of spreads despite volatility in the auto sector and uncertainty over U.S. interest rates indicated a robust CDS market. "There were no major changes and it [the market] is strong," said one trader. He also noted there was activity on the iTraxx HiVol, where spreads tightened to 76 bps from 80 bps the week before.