Issuance of credit range accrual notes referencing the iTraxx index is burgeoning as players express views on credit volatility. Traders say many investors believe default spreads will remain range-bound over the coming months and are using the notes to express that view. "We have seen more than EUR50 million in the past two months," said Marcus Schüler, managing director in integrated credit marketing at Deutsche Bank in London.
Credit range accruals feature upper and lower limits and pay a coupon based on how long spreads in the iTraxx credit index remain within the range. Schuler said in June his firm launched a series of two-year notes which typically feature barriers of 25 basis points and 50 basis points. The iTraxx this week dipped below 30 bps for the first time in three months, but traders said the 25 barrier is still very safe.
The notes first hit the market last year as a way for funds to play credit volatility in the same manner in which they trade equity and interest rate vol. Other firms including JPMorgan are also offering notes (DW, 12/23).
