Strong collateralized debt obligation flows in Europe over the past month have filtered through to credit index trading--dealers who had built up long single-name protection exposure were hedging last week by selling protection on indices. The convergence moved spreads on the iTraxx suite tighter, with the five-year Main moving to 31 bps as DW went to press Thursday from 33 basis points at opening of trading Wednesday.
The price of five-year protection on the iTraxx HiVol tightened to around 271 bps Thursday from 294 Monday and the Crossover drew in to 56 bps from 59 bps over the same period. Protection selling at the five-year tenor was most typical, but there was also activity at seven- and ten-years to match exposure in longer-dated CDOs, traders said. "A lot of dealers were taking the deltas of the CDOs down on their own books and the whole Street was very short," said one London-based trading skipper. "Quite a few people got nervous and backed up the shorts," added another trader.
In addition, traders said optimism filtered through from the global equity market, which rallied Wednesday on the back of Federal Reserve chairman Ben Bernanke's dovish testimony to congress. The chairman suggested the Fed may be near the end of its interest-rate tightening campaign. "The mood in CDS is positive," said one official, continuing. "Oil prices are looking stable, equities are bouncing back and because everything is correlated so closely credit is looking good too."
