High yield markets win big in 2022’s love-letter to CDS

Dan Alderson

Deputy editor

Tradeable credit assets have suffered a rough year for liquidity and returns, but credit derivatives are among a small group of products defiantly enjoying a bumper year. And, in contrast to bonds, it is the less liquid high yield markets that are gaining most ground.

CDS volume in 2022 already surpasses all recent full-year tallies, despite covid-19 having sparked a post-financial crisis quarterly record of $4 trillion notional in Q1 2020. This year’s Q1 brought an even greater $4.5 trillion spike, amid Russia’s invasion of Ukraine, but there has been little regression since, with $3.7 trillion and $3.6 trillion tallies following, according to Isda SwapsInfo data.

October trading, while less frantic than during the late September UK mini budget-prompted panic, points to a final quarter of at least similar magnitude.

European volume is surging most, with 80% more average weekly trading in iTraxx Europe than in 2021 and 83% more in Crossover. CDX HY is also up 70%, against a 63% rise in CDX IG.

“At first glance, this may seem somewhat surprising, given that the volatility in the market has largely originated from rates, which should matter more for IG than HY,” says Jigar Patel, US credit strategist at Barclays.

“We think the pickup in volumes makes sense”

Jigar Patel, US credit strategist | Barclays

“But in an environment where investors are increasingly looking for liquid ways to express views and manage risk, we think the pick-up in volumes makes sense.”

This is in sharp contrast to US high yield bonds, whose Trace volume has dropped by 6% this year. But the upward momentum in high yield CDS trading versus investment grade looks set to continue into 2023.

“As and when rates volatility slows and the attention turns to economic downside, we see scope for Crossover and CDX HY volumes to rise relative to Main and CDX IG,” says Patel.

Trading in iTraxx Senior Financials has also surged, gaining 74% year-on-year. This is despite the basket having outperformed the corporate part of the Main index.

“As European Central Bank quantitative tightening starts next year — we’re expecting March — more fragmentation risk could be priced in,” says Soren Willemann, head of European credit strategy at Barclays.

This will allow senior financial volumes to stay elevated next year as well, he adds.

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November 2022 | Issue 250

Published in London & New York.