A state of equilibrium

Implied correlation has rallied substantially over the fourth quarter, with CDX correlation approaching 14% in five years and 12% in seven and 10 years; iTraxx correlation is about a point higher than its US counterpart across the maturity spectrum. Investors still anchored in May 2005 failed to capitalise on the rally, and several dealers got caught short correlation - their ultimate capitulation fuelled the rally. What happened?

The world is no more or less idiosyncratic than it was three m

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