One of the dynamics that might not be readily apparent to anyone who focuses myopically on equities and/or easy-to-interpret measures of equity volatility is the extent to which credit has perhaps been the most resilient of all assets coming off the deflationary doldrums of February 2016.
If you follow credit markets, you know we’ve seen periods this year where you’d be forgiven for thinking traders simply went on vacation. For instance, recall this hilarious header from a Deutsche Bank note out in April:
If you missed that piece, you can check it out here, but do note this excerpt:
For Europe, the overall IG non-financials index has only seen a stunningly low 6bps range so far in 2017 – the same number for single-As with BBBs incredibly trading in a narrow 7bps range. The ‘IG All’ corporate index includes financials and across the different rating bands is generally only marginally behind 2006 and/or 2007 as the least volatile year ever. Financials haven’t really been volatile but they’ve performed well, which gives them a higher spread range than had they had a more neutral year. Virtually all Sterling and Dollar IG non-financial indices are also in the lowest three volatile years since the iBoxx indices started in 2000.
So think about that in the context of this from Richard Breslow out Thursday:
The S&P e-mini future has just too much noise emanating from it at the moment. Especially as it gets knocked around at all hours. You’re better off watching some of the slower moving credit spread indexes to see how deeply these cuts are being perceived by real investors. Their long-term moves have been just as momentous as other assets but with much less zigging and zagging to the theme of the day. And don’t just watch U.S.-centric measures such as the Markit CDX North America IG Index, but also the Markit iTraxx Europe Crossover for signs, or lack thereof, of contagion.
