A strong pipeline for constant proportion debt obligations has caused spreads on North American and European investment-grade credit derivatives indices to rally to all-time tights. CPDOs sell protection on five-year CDX and iTraxx indices, which traded Tuesday at 33.5 basis points and 24 bps, respectively. Ashish Shah, head of global structured credit and CDO research at Lehman Brothers in New York, said spreads have tightened relative to their intrinsic value, making it less attractive to print deals, but said it is still possible.
Credit derivatives traders said CPDO issuance has also contributed to a significant drop in realized volatility on index options. "Implied vol is still at meaningful levels," said one trader. "But realized vol has dropped off a cliff." Thirty-day realized volatility on the iTraxx Europe was at 18% Wednesday from about 30% in August, while implied volatility for December options was 31% Wednesday.
