Well, I'd expect the itraxx spreads to tighten when there's a rollover since the worst ones would be left out of the index and relatively better ones would get in.However it's the other way around and spreads are expected to widen by 17 bps for itraxx crossover and 4bps wider for Europe. Could someone explain why this is so?Thanks.

QuoteOriginally posted by: nicholaihelWell, I'd expect the itraxx spreads to tighten when there's a rollover since the worst ones would be left out of the index and relatively better ones would get in.However it's the other way around and spreads are expected to widen by 17 bps for itraxx crossover and 4bps wider for Europe. Could someone explain why this is so?Thanks.Don't forget the new series 5Y will be 5.25 years compared to 4.75 for the old. I am just calculating fair value of the new indices at the moment but I don't think the difference is that great

This year the replacement names are trading pretty much in line with the ones that are getting kicked out. however, due to this freakin' credit crisis, the spread curves are pretty flat, so the time decay shouldn't have too much of an effect. There is loads of research out on this topic at this time of year (the iTraxx gets rolled thursday next week) and everybody gives estimates where the spread will be. I'm not sure about the numbers, but i think I saw that Crossover Series 9 is expected to trade tighter than Series 8 while Europe is wider. (don't nail me on this... just out of the back of my head)

QuoteOriginally posted by: NoelWatsonQuoteOriginally posted by: nicholaihelWell, I'd expect the itraxx spreads to tighten when there's a rollover since the worst ones would be left out of the index and relatively better ones would get in.However it's the other way around and spreads are expected to widen by 17 bps for itraxx crossover and 4bps wider for Europe. Could someone explain why this is so?Thanks.Don't forget the new series 5Y will be 5.25 years compared to 4.75 for the old. I am just calculating fair value of the new indices at the moment but I don't think the difference is that greatAnd the dispersion for the new names is less with the new index rather than the old, so the duration weighted average of the underlying names is closer to the average for S9 than for S8.

Thankx for the answers.That's part of what I read in Dow Jones Newswires:"With significantly lower dispersion in the new Crossover index, this should have an impact, according to SocGen.And, of course, investors normally roll short positions into the new series before longs, meaning the new on-the-run index tends to trade wider than its predecessor.Looking at the aggregate impact of these factors, SocGen expects all the new iTraxx indexes to open wider. The bank sees Markit iTraxx Crossover S9 trading over 17 basis points wider than S8. Europe S9 could trade 4bps wider in 5-year, and HiVol 7.2bps wider.The widening could be more pronounced in the 3-year maturity, where curves are steeper."So the thing is I actually wonder why investors would tend to roll short positions into the new series before longs?If I'd expect the spreads to widen knowing this widening effect after the rollover, I'd long rather than short the Itraxx waititng for a correction. But it seems there's something going on that I don't understand.Any explanations for that?

QuoteOriginally posted by: nicholaihelThankx for the answers.That's part of what I read in Dow Jones Newswires:"With significantly lower dispersion in the new Crossover index, this should have an impact, according to SocGen.And, of course, investors normally roll short positions into the new series before longs, meaning the new on-the-run index tends to trade wider than its predecessor.Looking at the aggregate impact of these factors, SocGen expects all the new iTraxx indexes to open wider. The bank sees Markit iTraxx Crossover S9 trading over 17 basis points wider than S8. Europe S9 could trade 4bps wider in 5-year, and HiVol 7.2bps wider.The widening could be more pronounced in the 3-year maturity, where curves are steeper."So the thing is I actually wonder why investors would tend to roll short positions into the new series before longs?If I'd expect the spreads to widen knowing this widening effect after the rollover, I'd long rather than short the Itraxx waititng for a correction. But it seems there's something going on that I don't understand.Any explanations for that?The only reason I can think they would roll short (sell old index and buy new) is because they know CPDOs are having to do the opposite so it shouldn't be a crowded trade.

Well, I don't get it because it seems that they short the new index rather than the old index and that's exactly why the spreads of the indices are expected to widen.So it's not about selling the old one and buying the new one and I still don't get the trading idea behind this.QuoteOriginally posted by: NoelWatsonQuoteOriginally posted by: nicholaihelThankx for the answers.That's part of what I read in Dow Jones Newswires:"With significantly lower dispersion in the new Crossover index, this should have an impact, according to SocGen.And, of course, investors normally roll short positions into the new series before longs, meaning the new on-the-run index tends to trade wider than its predecessor.Looking at the aggregate impact of these factors, SocGen expects all the new iTraxx indexes to open wider. The bank sees Markit iTraxx Crossover S9 trading over 17 basis points wider than S8. Europe S9 could trade 4bps wider in 5-year, and HiVol 7.2bps wider.The widening could be more pronounced in the 3-year maturity, where curves are steeper."So the thing is I actually wonder why investors would tend to roll short positions into the new series before longs?If I'd expect the spreads to widen knowing this widening effect after the rollover, I'd long rather than short the Itraxx waititng for a correction. But it seems there's something going on that I don't understand.Any explanations for that?The only reason I can think they would roll short (sell old index and buy new) is because they know CPDOs are having to do the opposite so it shouldn't be a crowded trade.

Three points1) CPDOs have more space in the financial press than their size allows. They are not the reason for why the roll acts as it does. Further (as commented on above), CPDOs will be selling protection in the new index and buying protection in the old. This will cause the new index to tighten relative to the old index, flattening curves. 2) There are two main opposing forces for the roll: a) removing credits which are wider and b) extending maturity. If CDS curves were completely flat, the roll would probably open up tighter. But the effect of b) tends to dominate... less so at the upcoming roll. Note, however, that in earlier rolls in CDX NA IG we have actually seen that the new index came out tigther than the old one. 3) Technicals. Anecdotal evidence suggests that investors who are buying protection will prefer to buy protection in the on-the-run. This is because off-the-run curves traditionally decay quickly, making it costly (in terms of spread break-evens) to remain in the off-the-run. On the other hand, investors who are selling protection would like to benefit from the roll-down and hence prefer not to roll. Net-net, the roll should generally widen post-open. It is quite likely that investors pre-position for this, causing the on-the-run spread to be wider than otherwise. Hope this helps

Quote CPDOs have more space in the financial press than their size allows. not anymore at least...most of them have unwound large portions of their risk and some have been unwound entirely.I was a Market Maker on iTraxx when those bastards were issued (unfortunately not by us) ant the iTraxx was tightening by 5 points over a few days... that was massive back then...nobody would even recognise anymore.

QuoteOriginally posted by: friesenjungQuote CPDOs have more space in the financial press than their size allows. not anymore at least...most of them have unwound large portions of their risk and some have been unwound entirely.I was a Market Maker on iTraxx when those bastards were issued (unfortunately not by us) ant the iTraxx was tightening by 5 points over a few days... that was massive back then...nobody would even recognise anymore.friesenjung,I was only aware of one CPDO having been unwound so farhttp://ftalphaville.ft.com/blog/2007/11/28/9228/the-cpdo-imminent-unwind/When you say that most of them have unwound large portions of their riska). According to the literature I have read, they tend to increase leaverage when losing money - until they hit the leverage/NAV threshold, when they unwond completelyb). Rebalancing only occurs on rolldates, so as far as I'm aware, no rebalancing has taken place since last Sept.

I heard of at least three CPDOs that have been triggered, i.e. "unwound". Problem is that those have been set up in private deals so it is difficult to track exactly.what I meant is rather that people who were invested into this stuff have sold their positions or tried to get out of there somehow otherwise by restructuring. I admit I was expressing this not correctly.