Spreads were tightening last week on the back of market players selling index protection and reversing a buying trend earlier in the week. Speculative players sold off positions in the European iTraxx credit indices as market doom and gloom connected to high oil prices and more trouble in the auto sector eased off. "Spreads [went] up and down like a yo-yo," one trader said.
On Wednesday, spreads on the iTraxx Europe HiVol index tightened to 71-72 basis points from 77bps earlier in the week when hedge funds and proprietary desks rushed to sell protection. Officials cited a fall in the oil price to USD57 from USD60 as the catalyst for easing market fears and causing the one-way traffic. One trader attributed the selling spree to protection sellers who were long the iTraxx HiVol index unloading their positions when spreads widened.
Previously, dealers had been quick to buy protection after a profit warning was issued on Ford Motor Co. and credit rating agencies warned of a further credit downgrade, traders reported. This pushed spreads to widen to 77 bps on Monday, blowing out from the low 70s the week before. "Profit takers bought because they were concerned," one trader said.
Players turned toward the indices and away from trading single names because they provide more stability, said one official, adding, "The market moves made people nervous and led to these risk aversion strategies". Market players also cited greater liquidity in the indices than the single names market for the higher levels of activity.
