The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site. Please see our Subscription Terms and Conditions.


All material subject to strictly enforced copyright laws. © 2022 Euromoney, a part of the Euromoney Institutional Investor PLC.
CAPITAL MARKETS

Credit derivatives: Go easy on the curves

LBOs and technicals have boosted betting on the continuing steepness of the European credit curve. But nothing good lasts for ever and several things could upset the apple cart.

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 the shorter term,” says Daniel Berman, head of credit product management at JPMorgan. “The company might be cash-rich and have low short-term funding needs, but in the longer term its business profile will dominate. Therefore, while three- to five-year CDS are tight, 10-years trade much wider.”

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree