The index representing a basket of credit default swaps, iTraxx (series 23), has jumped to 115.3, a level not seen since October 2013. This period was the aftermath of the so-called ‘taper tantrum’ when bond markets were worried about the US Fed raising withdrawing its monetary stimulus by winding back its US$85bn a month bond buying programme.
Credit default swaps are essentially insurance contracts where buyers are paid out if a bond issuer defaults. These contracts are analogous to a house insurance: the insurance company will pay an owner of an insured house which has been destroyed by fire.
iTraxx is an index of credit default swap contracts over bonds issued by large, well-known companies such as BHP and the major banks. The index is rebalanced each March and September with the most active credit default swaps included in the index. The current iTraxx series is the 23rd.
An upward movement in the index indicates the cost of insuring against default by the issuers has gone up on average. This is often used by the market as a proxy for rising concerns about the likelihood of a corporate bond default. In general terms, the more negative the outlook on the economy is, the higher the risk of a corporate defaulting on its debt.
The iTraxx Australia index has been moving up since a low of 81 in March 2015 but recently the moves have become larger. In mid-August the index was at just over 100 points with typical movements of 1 or 2 points a day but with only a few days to the end of the month the index has jumped sharply to 115pts. This has been put down to rising fears of a slowdown in Chinese and global growth and the subsequent higher likelihood of a corporate bond default.
Read More:
What is iTraxx?