OTC Debrief: Synthetic Market has not Settled Yet

The synthetic credit index market was again very active from February the 19th to February the 23rd of February. The US fixed income market was closed the 19th, due to presidents’ day, but volumes remained close to the volumes of the former week. According to figure 1, traded volumes of liquid indices remained around 150% of their respective open positions. The week also saw significant changes in open positions. According to figure 2, the iTraxx Europe Financials Senior Series 28 (ITXES528) open position increased by more than 5% while the iTraxx Europe Crossover Series 28 (ITXES528) decreased by more than -5%. The Italian election at the end of this week is a source of tail risk hedging by the investment community. The Financial index is back on the front line to short European risks. The iTraxx Europe Crossover is out of favor. It is trading cheap to its fair value and it is affected by few negative credit stories.

On the single name front, the largest open interests are in sovereign CDS. Italy (including Isda 2003 and Isda 2014 definitions) has close to 50BUSD open positions. Due to the coming poll, more than 1.5BUSD traded and the open interest on Italy 2014 increased by 500MUSD. Italy CDS is still nevertheless trading at its tightest level over the last 2 years. Last week, Grocer ABS (New Albertson’s) announced that they will buy what remains of RAD (Rite Aid Corporation ) in a deal that will continue to reshape the US retail and health care industries, after RAD failed to sell itself to Walgreens. RADS CDS was the most traded corporate CDS with 300MUSD cleared and the CDS tighter by 200bps.