Derisking

Spreads were broadly wider in the US as all the indices deteriorated. Indices generally outperformed intrinsics (as post-roll derisking covered by index hedges seemed prevalent) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

The name of the game last week was the roll, with the expiration of the June contract leading to over $300 billion in Matured Transactions. New protection creation was delayed into the roll and this week will likely see a comparable pick up in new protection purchasing. Approximately $200 billion in net notional exposure was removed from the system, however with $300 billion accounting solely to terminations, implies there was a net $100 billion purchasing offset that was not roll related.

The name of the game last week was the roll, with the expiration of the June contract leading to over $300 billion in Matured Transactions. New protection creation was delayed into the roll and this week will likely see a comparable pick up in new protection purchasing. Approximately $200 billion in net notional exposure was removed from the system, however with $300 billion accounting solely to terminations, implies there was a net $100 billion purchasing offset that was not roll related.

Spreads were broadly wider in the US as all the indices deteriorated. Indices generally outperformed intrinsics (as post-roll derisking covered by index hedges seemed prevalent) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

After three very volatile weeks, it seems the CDS world tapered off modestly. While action was rather subdued, the bulk of activity was focused on insurance buying, with over $63 billion in net notional being purchased in over 3,400 contracts. Total cumulative CDS action since the beginning of April grew to over $400 billion, and virtually all sectors are now net derisked over the past 2 months, with the consumer leading the risk parade.

After many weeks of cumulative derisking, the CDS market rerisked violently, most notably in the Consumer Goods and Consumer Service sectors, where a total of $169 billion in net notional open interest rerisking occurred. One explanation is that the big move is due to unwinding of new issue basis trades put on over the past month as horrendous companies issued all sorts of garbage debt.

Credit is now officially done with the rally. While last week's unprecedented $215 billion in CDS purchased will likely be a record for a while, this week saw yet another substantial $120 billion in net notional increase, based on 5,770 contracts exchanged. Also, net cumulative notional CDS by sector has surpassed the half a trillion mark since early April.

Credit is now officially done with the rally. While last week's unprecedented $215 billion in CDS purchased will likely be a record for a while, this week saw yet another substantial $120 billion in net notional increase, based on 5,770 contracts exchanged. Also, net cumulative notional CDS by sector has surpassed the half a trillion mark since early April.

The latest data out of DTCC indicates that the volatility in the equity world is spreading to credit. Not only that, but last week the CDS market turned decidedly pessimistic, with over $215 billion in net CDS purchased, the highest amount in terms of net notional in over 2 months. Cumulative net CDS purchased since the start of April has ramped up to almost half a trillion dollars.

"Buy CDS" - that was the overarching theme from last week as $141 billion of rerisking occurred across all major sectors. Absent some nominal CDS derisking in Oil & Gas and Tech/Telecom, every single space saw credit traders betting that risk will increase. Of course, absent some swooning on Monday of this week, irrational exuberance 2.0 still dominates the equity markets, once again implying that credit is either generally more pessimistic than equities, or that CDS traders are much faster to bail at the first whiff of the squeeze ending.

"Buy CDS" - that was the overarching theme from last week as $141 billion of rerisking occurred across all major sectors. Absent some nominal CDS derisking in Oil & Gas and Tech/Telecom, every single space saw credit traders betting that risk will increase. Of course, absent some swooning on Monday of this week, irrational exuberance 2.0 still dominates the equity markets, once again implying that credit is either generally more pessimistic than equities, or that CDS traders are much faster to bail at the first whiff of the squeeze ending.

Last week was relatively quiet in the CDS market, shadowing the complete lack of liquidity in equities. Notable traded sectors were consumer Services and Industrials which saw a net gross notional rerisking of $32 and $39 billion, on 7,127 and 3,888 contracts respectively. Aside from these two sectors, the only other sector that saw marginal rerisking was Tech/Telecom with $11 billion in notional traded. All other sectors saw a net rerisking, for a total tally in the prior week of a rerisking of $23 billion.

Last week was relatively quiet in the CDS market, shadowing the complete lack of liquidity in equities. Notable traded sectors were consumer Services and Industrials which saw a net gross notional rerisking of $32 and $39 billion, on 7,127 and 3,888 contracts respectively. Aside from these two sectors, the only other sector that saw marginal rerisking was Tech/Telecom with $11 billion in notional traded. All other sectors saw a net rerisking, for a total tally in the prior week of a rerisking of $23 billion.

Spreads were broadly wider in the US as all the indices deteriorated. Indices generally outperformed intrinsics (as we see high beta shorts selling index protection as hedges) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed.

Spreads were tighter in the US today as all the indices improved (although the early capitulation rally gave way to OWICs and derisking as the afternoon wore on). Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew (but remains the richest index), ExHVOL outperformed pushing the skew wider (after getting to zero intraday), XO underperformed but compressed the skew, and HY's skew widened as it underperformed.