Jump To Default
The one market seemingly everyone "knows" is a bubble is the treasury market. That is the market that just made new low yields on the 30 year bond for the year. GTAT, which is the first true "jump to default" I have ever seen looks exactly like a "bubble" popping, is spurring the rethinking of where the risk is in high yield.
With CDX and credit indices being such a topic of conversation, we took a look at the 1 month changes as of May 12th. We selected U.S. and European Credit Indices that had NET position changes of $1 billion during that 4 week period. We also included some with smaller changes where it made sense to me as either part of “normal” roll flows or the now legendary “whale” trade. The overall reduction in HY and XOVER is interesting. Also, even in financials, the riskier sub index experienced a net decrease. I’m not sure what it means. Complacency? Increased volatility forcing smaller position sizes? JPM cutting HY short and shorting IG18 against IG9? The off-the-run data is a bit more interesting, especially in light of all the “whale” questions. IG9 tranche net actually increased in the period, though outright index dropped off. Is that a sign that it was hard to get out of tranches? IG9 with that special place in everyone’s heart, does seem strange. It looks like positions in European indices got reduced pretty dramatically. In any case, all these products need to be moved to an exchange. Look at the huge differential between the gross and the net? That would go down. Yes, banks would have to unwind offsetting trades, but who cares? Banks would have to post collateral, possibly on longs and shorts, but again who cares?