The differential between the five-year and the 10-year iTraxx Europe Index is about 23 basis points. This is close to record highs. At the end of last September, when the new Series 4 Index was rolled out, it was 19bp. Roughly half of this 4bp steepening in five months is a result of rolldown, as the five-year index tightens faster over time because of exaggerated steepness of the curve in the shorter maturities, but 2bp represents genuine steepening.
It is the result of a combination of fundamental and technical factors. First, the sharp increase in leveraged buyout business and rumoured LBO business in the past few months has pushed credit curves steeper for a lot of single names.
The curve also reflects the European credit cycle. “A steep credit curve can reflect investors’ perception that a company is most likely to default in five to 10 years, rather than in...
