The European iTraxx credit indices volumes eclipsed trading on single names last week. Activity was driven by a double whammy of low liquidity in single names and a dip in equity prices which made index trades a more attractive play. "ITraxx is certainly where the focus is," said one official.
Most players were selling protection at five years and as a result spreads continued to grind tighter at this maturity, reaching levels some say are record tights for any index vintage. The iTraxx Europe shrunk to 26.25 basis points on Wednesday from around 30 bps last week, but was trading slightly higher at 27 bps on Thursday morning. HiVol swooped to around 45 bps on Thursday from 50 bps a week prior and Crossover tightened to 225 bps from 247 bps over the same period.
"Most of the dealers now don't want to buy single name CDS because spreads are just too tight and liquidity is shifting to the indices," said one London-based trader. Another added there was a lack of news on single names for players to differentiate worthwhile opportunities. A buy-side official speculated the short bank holiday week in Europe would also have contributed to investor reluctance to take immediate action on single names.
"ITraxx levels look tight but we believe they will remain tight over the coming months," wrote London-based researchers at JPMorgan in a recent report. They noted the demand for structured, levered credit risk will keep protection prices where they are.
