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Derivatives

Large Index Hedges Drive Euro Correlation Rise

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.

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.

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