Hedge funds and bank prop desks are putting five-to-10-year yield curve steepeners on an off-the-run investment grade credit derivatives index. The index is exposed to auto spread tightening in the front end of the curve.
CDX.IG.4 includes autos, which dropped out of the CDX index in September. In the trades, investors are positioning for the yield curve to steepen by selling five-year protection and buying 10-year protection.
The five-to-10 CDX.IG.4 curve has already steepened from 23 basis points to 25 bps in the past month, and traders said it could steepen to as much as 32 bps. On Thursday, five-year spreads were 37 bps and 10-year spreads were 63 bps.
Index tightening is being driven mainly by single-name auto and parts maker tightening. Five-year credit-default swap spreads on Ford Motor Co. tightened nearly 350 bps in the last month, from 940 bps July 18 to 600 bps August 17. And five-year CDS on General Motors tightened more than 200 bps from 815 bps July 18 to 590 bps August 17.
