The iTraxx and CDX Crossover credit indices will outperform their investment-grade counterparts over the next few months as they are less exposed to a rise in corporate event risk. Analysts say crossover names, excluding U.S. autos, are highly leveraged and less likely to be takeover targets, or to borrow further to acquire a competitor. The crossover indices look set to be stable and offer good value in the face of increasing volatility in the main indices, analysts noted. At present, implied volatility on the iTraxx Main is 36% and 37% on the iTraxx Crossover.
With default rates not expected to rise significantly until the end of the year, corporate events will be a major mover of credit index spreads. Thibault Scaramanga, index strategist at Barclays Capital in London, noted in a recent report that such activity could be a positive for crossover firms. If anything, these names are more likely to be acquired by a large blue chip firm with a higher rating and lower credit spread, he explained.
