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Signs of new dawn as tranche volumes smash past $250bn
January 2021 | Issue 230
Dan Alderson
Deputy editor
Last year, people formed fresh habits as they adapted to the coronavirus pandemic. Similarly, in credit, a breakthrough year for the CDS tranche market is leading participants to believe that elevated tranche volumes are here to stay.
Having proved their worth in 2020 amid record volumes, CDS index tranches look set to be an important part of credit traders’ 2021 arsenals. “The index tranche universe has performed well, as indices have repriced back to February levels,” says Jochen Felsenheimer, managing director at Xaia Investment. “They will be a useful way to position for idiosyncratic risk and portfolio dispersion in 2021.”

Volumes for iTraxx and CDX tranches stood at about $252 billion notional, according to the DTCC’s most recent tally on 27 November. This was well beyond the $210 billion traded in the whole of 2019, the previous record since the 2009 index series matured. Around $186 billion had been traded at 27 November 2019, suggesting the full-year 2020 total will be even more impressive.
“They will be a useful way to position for idiosyncratic risk and portfolio dispersion in 2021”
Jochen Felsenheimer, Managing director | Xaia Investment
“Every family of tranches is up by a similar amount,” says one index tranche market maker. “iTraxx Crossover volume lags slightly, up 22%, but it’s very uniform at 30-35% otherwise, and the uptick in high yield business has been noticeable.”
CDX HY index tranche trading accounted for $45 billion as of 27 November and Crossover tranches, which only launched in 2014, had reached half that total with far fewer participants.

While the bulk of 2020 tranche business (around $120 billion) came in the first quarter due to the March sell-off, successive $50 billion volumes in Q2 and Q3 looked set to be surpassed in the final push. Having reached $30 billion at 27 November, dealers expected Q4 to surpass $60 billion in the final analysis, even with a trading drop from mid-December.
Anecdotally, Creditflux understands tranche participation is up by around 30% — treble the number five years ago. This has been met by dealer uptick, with five or six supporting European and US business rather than just two or three, as in prior years. “I would expect volumes in 2021 to fall back in line with the run rate to around $230 billion,” says the trader. “That said, most participants had a positive interaction with the product in 2020 and this has brought renewed confidence.”
Through November going into December, the big theme was spread compression, with outperformances in Crossover and HY indices, and junior tranches outperforming senior.
In 2021 investors will have to weigh knee-jerk reactions to events such as Brexit and stimulus announcements against returning idiosyncratic risk as businesses that receive government support perform better than those that don’t.
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Global credit funds & CLO's
January 2021
| Issue 230
Published in London & New York.
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