Roll Discipline

March 20th will be the next roll for indices and single names. The 5Y on-the-run maturity will be extended from December 2022 to June 2023. New vintages of credit indices (series 29 in Europe and Asia, series 30 in North America) will be issued. Investors will look at the benefit of keeping or rolling their indices from current into the next to be issued series. Rolling is the best strategy to benefit from the best liquidity on indices, market depth and bid-offer. Looking at the open interest published by clearing houses, it appears that US investors are much more disciplined than their European counterparts. Open interest on high yield is larger on the on-the-run than in the total of the off-the-run. On investment grade, the open-interest is very close between on and off-the-run. The picture is different in Europe; on Europe investment grade index, the open interest of the off-the-run, is 3 times larger than the open interest of the on -the-run. There are more passive investment or static hedges in Europe than in the US. As a consequence, there is more hidden risk in the European index market than in the US one. We shall keep an eye on roll discipline at the end of the month.

Last week, the market settled. Figure 2 provides lower numbers for traded notional versus the open-interest compared to the week before. In figure 3, we see as well an increase by more than 10% of the open interest on the US investment grade index. Trump going to war on trade was a source of concern for investors. At the same time, the Italy election was not perceived as a source of risk for Europe. The hung parliament was somehow expected. In the short term, investors are looking to trade on the implication of Trump policy on free trade and, at the same time, the technical of the synthetic market going into the March roll.