Months of spread tightening on the European iTraxx suite reversed this week on the back of players exiting long bond/short credit-default swap positions. Traders said last week's downturn in the cash equity markets acted as a signal for people to take profit and buy protection on the indices, which drove spreads wider. "People have been trigger-happy calling the chop," said one London-based trader.
The five-year European Main index broadened to 30.5 basis points Tuesday from 26 bps last week, five-year crossover to 252 bps from 225 bps and the five-year HiVol to 54.25 bps from 45 bps over the same period. There was also widening in index tranches, with iTraxx seven-year 3-6% 25 bps wider at 155 bps.
Credit officials, however, don't expect the widening trend to last. "The sell-off will run out of steam," said one strategist ata European house, who noted it was speculative trading pressure driving the blowout and these positions could be reversed again shortly.