Are Aussie iTraxx trades the right hedge?
Anxiety about Chinese growth and the latest bout of eurozone debt panic appear to have triggered a surge in spreads on Australia’s credit index. But are credit spreads on Australian companies an effective general-purpose hedge against non-domestic economic movements?
If you take the word of the credit default swap (CDS) market, Australia’s companies were roughly one-quarter riskier on July 12 than they had been on May 2, following an eye-catching surge in spreads, notionals and trading activity on Markit’s iTraxx Australia credit index. But dealers warn against taking this activity at face value: some say the index is being used to hedge exposure to China, while others say it’s tied more to the eurozone’s sovereign debt woes. Still others try to bridge the
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