Credit Trading Desk Analyst Commentary
www.GlobalMarkets.bnpparibas.com Please refer to important information at the end of the commentary and MAR disclosure.
Eyes on iTraxx & CDX indices
The three week rally paused this week with iTraxx Main and CDX IG trading sideways, the same can be said for QW5A and
IBOXIG indices only marginally tighter w-o-w as well as IBOXMJA and IBOXHY marginally wider. Central Banks have been less
vocal this week and little is worth mentioning except for James Bullard and Jerome Powell who attempted to lower market
expectations regarding the announcement at the next Fed meeting (25 July). Now all eyes are on this weekend’s G20 meeting
and specifically on the meeting between President Trump and President Xi on Saturday. Our base case is that it will end-up
being a non-event with no deal being immediately reached. As far as Credit is concerned, our view is that the avoidance of an
escalation will allow the € and $ Investment Grade Cash markets to grind tighter with supply starting to decline after the high
level of debt issued in June particularly in Europe.
In Europe, we recommend investors to maintain the negative basis trades we initiated recently. They have started to perform but
should potentially do better in the next two weeks with supply decreasing in July as Corporates enter their blackout period.
Specifically on our Long QW5A TRS Sep’19/Short iTraxx Main trade idea recommended on 13 June, we acknowledge that the
TRS is trading c.7bp expensive vs. its NAV (iTraxx Main skew is ‘only’ c.4bp) but we expect the extent of the cheapness of the
Cash/CDS basis (c.20bp for € IG Non-Financials and c.35bp for € IG Financials Senior compared to averages over the CSPP
period) to allow the trade to perform. Note that the month of July is normally the best of the year for € IG basis; seasonality
shows a tightening in nine out of the past ten months of July.
In the US, CDX IG trades around fair-value vs. SPX and the price of Oil even if the Energy sector continues to trade cheap
considering the WTI recovery. The exact same applies to CDX HY which has underperformed WTI but trades fair-value in our
two-factor model vs. SPX and WTI. We see in the Cash/CDS basis the most appealing trade and recommend investors to Buy
IBOXIG TRS September 2019 and hedge it with iTraxx Main which 1) discounts in excessive dovishness from the ECB and
2) trades expensive vs. CDX IG considering the level of systemic risk in Europe and the price of Oil.
Index levels
Long $ IBOXIG TRS September 2019 vs. iTraxx Main
The rationale for this trade is based on the following key
points:
i. $ IG Cash/CDS basis is cheap. We have previously
recommended various Long Basis trade ideas in
Europe, at both macro and micro levels (and this
remains the strategy where we see the best
risk/reward in Europe). We also see value in
Cash/CDS basis in $ IG (Chart 1).
Chart 1: $ Investment Grade Cash/CDS basis is cheap,
particularly in Non-Financials
Source: BNP Paribas, IHS Markit
ii. Our view that iTraxx Main trades tight on an
absolute basis. Such an outperformance stems from
the market’s anticipation of another wave of QE in
Europe. With regards to QE, we are not expecting an
announcement until October at the earliest, the
reasons being:
1) we think there will only be a change in forward
guidance at the 25 July meeting;
2) we only expect a rate cut and a formal
introduction of tiered rates at the 12 September
meeting.
While we understand the tightening of iTraxx indices
post the Central Banks’ dovish messages, we see very
limited tightening potential in iTraxx Main. The
constant maturity and roll-adjusted index is now
trading c.14bp below its average computed over the
effective CSPP buying period (6 June 2016 to end of
2018) and only c.8bp above the record tight of the past
four years reached in January 2018, the peak of the
CSPP period (Chart 2). It should be noted that while
anticipation of QE3 is fuelling the BTPS rally, the risk
of a No-Deal Brexit is on the rise as shown in the
weakening of the £ and the increase in £/$ implied
volatilities.
5
Y Level (bp, D1W)
53.6 ( -0.6) 65.9 (-1.6) 136.4 (-1.1) 256.5 (+3.5) 55.7 (+1.9) 328.5 (+8.8)
S
kew (bp, D1W)
-3.5 (+0.5) 0.5 (+1.1) 7.7 (+6.1) -23.0 (-4.1) -3.7 (+0.4) -29.5 (+4.6)
3
/5Y (bp, D1W)
27.0 ( -0.4)) - - - - 57.5 (-7.5)) 27.6 (+1.5) 95.0 (+0.0)
5
/10Y (bp, D1W)
45.8 (+1.3) 32.5 (-0.0) 50.0 (+0.0) 52.5 (-0.0)) 48.0 (+1.1) 40.0 (+0.0)
D
aily 3M imp. brkvn (bp, D1W)
1.6 (+0.1) 2.2 (+0.2) - - 5.8 (+0.5) 1.5 (+0.1) 6.5 (+0.3)
D
aily 1M real. vol. (bp, D1W)
1.4 (-0.3) 2.0 (-0.5) - - 6.2 (-0.7) 1.7 (+0.2) 8.0 (+0.1)
Da
ta as of 27-Jun-19 16:58 for indices; last close for volatility. Source: BNP Paribas, Bloomberg
S
UB
C
DX IG
C
DX HY
IG
HY
M
ST
S
EN
XO
i
Traxx Xover
i
Traxx Sen
i
Traxx Main
i
Traxx Sub
27 June 2019
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