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REFILE-Credit positions squared ahead of event risk
January 29, 2013 / 3:22 PM / 5 years ago

REFILE-Credit positions squared ahead of event risk

(Refiles to fix quote links)

* Credit indices break range for first time in 2013

* Retail and institutional investors seen selling financial paper

By Adam Parry

LONDON, Jan 29 (IFR) - Fears of a market shakeout ahead of the major event risk later in the week and sustained lightening up by investors in the financial sector have raised the probability the credit rally might finally run out of steam.

At first take, Tuesday’s moves in the European credit markets made little sense. For three weeks, the iTraxx Main and Senior Financials indices have been rangebound. Then, on a day devoid of data and auctions, the market takes out the upper ends of these tight ranges.

Ever since the fiscal cliff resolution on New Year’s Day continued the credit Santa rally, a decent correction has been well overdue.

The market began its run mid-November with the Main tightening by 36bp to trade at 100bp, hitting generic contract lows last seen back in the summer of 2011. The Crossover ratcheted in from 570bp to 414bp, also a level not seen since June 2011.

Since then, however, the indices have been treading water, waiting for the next catalyst to spark a major directional move.

The thing is, for investors that joined the party late, that is after the initial push downward on January 2, those index shorts - credit longs - have not really gone anywhere.

And here lies the crux. On the horizon we have a near perfect storm of event risk. Tomorrow there is US GDP, ADP Employment, the FOMC statement and Italian and German supply. Thursday brings month-end and the real start of the Q4 European earnings season, while Friday has the little matter of Nonfarm Payrolls and ISM Manufacturing.

With the indices unable to push tighter in January, and a correction overdue, it was perhaps just about understandable that some of those weaker index shorts should choose to offload those positions and take a fresh look at the market once all that event risk is out of the way.

Thus the gentle widening seen in late trade continued on the open this morning after the S&P 500 ended yesterday in the red - albeit marginally - for the first time in nine trading sessions.

By Tuesday lunchtime in London, the Main was 2.5bp wider at 108.5bp, taking the IG index over the top of the three-week 100-108bp range, and back to the 50% retracement of the rally from the last trading session of 2012 to the lower reaches of that range set in the middle of January. The Crossover was 9bp wider at 432bp, still safely ensconced within the confines of its own 414-441bp range.

The rot stopped as US traders took to their desks, though, and by 1515GMT according to Tradeweb, the Main was at 109.5bp, with the Crossover at 433bp.


Part of the reason why the Main underperformed the Crossover stemmed from some weakness in the financial sector, with Crossover S18 having no financial components.

Financials’ weakness really started in senior cash markets. For the last week or so, there has been sustained retail and institutional selling of both core and peripheral names in the cash, and that continued on the open this morning, with E-trading platforms getting hit from the word go.

That saw spreads widen by up to 5bp for choice, with Monday’s new JP Morgan 10-year issue trading at 118bp over Bunds, having priced at plus 114bp. Unlike last week, where the Street was vaguely apathetic to the retail selling interest, today saw some bids being hit in the broker market as dealers tried to lighten up on inventory acquired from customers.

After a muted start, cash selling started to impact the financial indices. The Senior Financials was 5bp wider at 142bp, taking it to the top of the recent 118-142bp range. The spread to the Main was at 33bp, with the key 30bp support level on that spread having solidly held over the last few sessions. The Subordinated was 7bp wider at 236bp.

Despite the heavier underlying tone in the markets, there was no let up in terms of primary activity. Whether that continues to be the case remains to be seen. (Reporting by Adam Parry, editing by Alex Chambers and Julian Baker)

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