Credit Investors Are Still Braced for a Blow-Out in Spreads

  • Options on CDX assign 9% probability to 40 basis-point surge
  • JPMorgan sees increased ‘market expectation of a tail event’
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Underneath the surface of a burgeoning calm in credit markets lies a fat-tailed monster: Options traders preparing for a sell-off that would spark a surge in risk premiums to levels not seen in two years.

Spreads in the cash market for U.S. corporate bonds have begun to reduceBloomberg Terminal, tracking a relief rally in stocks after a tough Bloomberg TerminalyearBloomberg Terminal for the vast majority of asset classes. But fears linger in credit derivatives, with benchmark indexes implying a higher chance of a major surge in spreads.