iTraxx volumes spike amid market panic

Daily volumes of credit default swap index contracts linked to European bonds cleared by Ice rocketed on March 12, to reach their highest level since December 2018, excepting periodic roll dates.

Ice Clear Credit and Ice Clear Europe cleared a combined €86.1 billion ($95.6 billion) of iTraxx Europe contracts on March 12, more than four times the average daily volume (ADV) going back to January 3, 2017. Not accounting for the days immediately before and after the contract roll dates in March and September, which see the highest daily volumes each year, March 12 saw the most activity since December 12, 2018.

ADV since February 24 has been €63.6 billion, compared with €19.6 billion over the period stretching back to January 2017.

 

The last two weeks have witnessed exceptionally large volumes of cleared iTraxx Main and iTraxx Senior Financials contracts. March 12 saw daily volumes for these contracts hit €66.8 billion and €6.8 billion, respectively – 199% and 171% of their ADV year-to-date.

What is it?

Ice volume data is the sum of the notional for trades where both the buyer and seller agree to clear the transaction. The figure is reported one-sided.

The iTraxx Europe Main index comprises 125 equally-weighted European investment-grade names; the iTraxx Crossover index has the 75 most-liquid non-investment-grade names; the Senior Financials index contains 30 financial institutions from the iTraxx Europe Main referencing their senior debt; and the Subordinated Financials index has the same institutions referencing their subordinated debt.  

Why it matters

Vast swathes of the European bond market are rated just a notch or two above junk status. The European Securities and Markets Authority (Esma) reported the share of outstanding corporate bonds in the European Union rated BBB grew from 20% to 30% during the five years to Q3 2019, to reach €2.1 trillion.

Issuers of these bonds may see their creditworthiness dip as the economic fallout from the spread of coronavirus continues. Fears that their debt holdings could sour probably triggered a stampede into iTraxx contracts by market participants. 

The surge in credit default index contract volumes referencing bank debt is likely to be a response to concerns that lenders will be particularly bruised by a virus-driven recession. Although the European Central Bank has offered firms relief from certain capital requirements, they are still likely to be stung by rock-bottom interest rates, chaotic trading activity and a wave of customer loan defaults.

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