Credit players have reported an upsurge in European iTraxx correlation in the past two weeks and attributed the move to a convergence of players using the index to put on key hedges. Correlation in five-, seven- and 10-year has risen by between 1% and 1.75% and there has also been a significant shift in five-year iTraxx equity correlation, which rose 2.5%, to 15% on Nov. 29 from 12.5% the week before. "It was a real blip," said one analyst, adding it was the single biggest jump in correlation his firm had recorded. On Friday, the tranche had leveled to around 13.5%.
Traders attributed the move to a flood of dealers buying more than USD10 billion of protection on the 3%-4% to 100% slices of the index to offset loan portfolios. In addition, a U.K. hedge fund bought more than USD100million in equity iTraxx protection when it launched a constant proportion portfolio insurance trade. "This is a significant move in a market that is still not desperately liquid," noted one official.
