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Derivatives

Equity Vol Leads CDS Players To Indices

Credit-default swap players reacted to continued volatility in equity markets this week by buying and selling protection on the iTraxx credit indices suite.

Credit-default swap players reacted to continued volatility in equity markets this week by buying and selling protection on the iTraxx credit indices suite. Traders said indices volumes eclipsed single name flows as investors looked to enter more liquid and less volatile positions.

There was a lot of money moving in and out of positions quickly, making for a choppy market with no clear direction, said one trading official. "People are just trying to guess and follow equity," noted another trader.

While the balance of protection buying and selling was roughly even, five-year spreads on the indices tightened marginally from last week. This likely came on the back of a pick up in bespoke collateralized debt obligation issuance, with dealers who are long protection and short the underlying selling into the indices to hedge, said a London-based strategist.

On Thursday, the price of five-year iTraxx Europe protection was 32.6 basis point, one basis point wider than Wednesday but tighter than last week when it was 33.3 bps. Also Thursday, the Crossover was trading at 261-263 bps and HiVol around 56 bps. Traders predicted spreads would likely change in reaction to U.S. data on gasoline stocks, which was due to be released as DW went to press, but declined to predict which way spreads would move.

"It feels as if we are trying to separate ourselves from the grip of the equity markets," saidMarcus Schüler, managing director in integrated credit marketing at Deutsche Bank. A broad range of players are driving flows, he added, including macro hedge funds, trading accounts and real money investors.

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