This Hasn’t Happened Since 2014 (iTraxx Edition)…

Ok, it looks like some folks have seen enough.

The effect of the ECB’s CSPP has been to drive credit spreads inexorably tighter in Europe which makes sense because, well, because they’re buying massive amounts of corporate bonds.

So you know, when you mop up all the fucking available securities while you’re simultaneously suppressing yields on govies, you’re effectively working on both the supply and the demand side of the equation.

That is, you’re creating demand for corporate credit by driving rates to zero (and below) on risk-free assets with PSPP, and then if that wasn’t enough, CSPP means you’re in the corporate market competing with the demand you just created.

draghi

Small wonder then, that the following charts look like they do:

Bubble

(BofAML)

Here’s Main and Xover:

iTraxx

Well, with everyone shouting from the rooftops about an “eye-watering” bubble in € credit, and with speculation running rampant about the effect an unwind of CSPP might have on the markets in which it operated, investors have now built a short position on Main for the first time in three years:

MainShort

As Bloomberg notes, “investors have amassed $7.1 billion of insurance on investment-grade corporate bonds [with the] turnaround attributable to credit funds hedging against the wind-down of the European Central Bank’s asset-purchase program, and global asset allocation funds preparing for a downturn in the business cycle.”

We’re gonna need more synthetic CDOs so we can get some protection selling going in size, goddammit.

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