The market is unlikely to materially quieten down as we enter the last stretch of 2020, as multiple risks loom on the horizon. Last week the market recorded its largest move since May – something that can be seen when looking at the synthetic credit-default swap (CDS) market (see figure 1). Unlike the cash bond market, the CDS index is not benefiting from the reach-for-spread environment that has resulted in a record amount of negative-yielding assets.
Figure 1. The synthetic market
Source: ICE Bond Indices, as at November 2020.
The key question centres around how bad conditions need to get before the central bank backstops the market – in other words, at what level is the strike for the European Central Bank’s (ECB’s) put? The ECB remarked last week that it was exploring what it could do in December, which has given the market confidence that further support is a real possibility.
As we learnt in the last quarter of 2018, spreads are more sensitive to macroeconomic developments at this less-liquid time of year. High levels of uncertainty mean that dispersion in the market is unlikely to fall, as stricter coronavirus-related measures put pressure on sectors that are directly affected by changes in consumer behaviour.