Friday, February 24, 2012

Hedges for Nervous Credit Investors

by Richard Barley

Wall Street Journal

February 24, 2012

The European credit market has rallied hard this year, buoyed by the European Central Bank's injection of three-year loans to banks. But under the surface of those calming waters, investors remain nervous.

ECB liquidity, while vital, cannot resolve the problems of slow growth and excess debt. Reflecting that reality, interest has been growing in hedges that protect against a renewal of the euro-zone crisis, dealers say.

A complicating factor for those seeking protection: near term, the rally may continue. The ECB will offer more loans next week, the Greek crisis may have been contained for now and economic data look promising. So simply taking a short position could prove painful.

And implied volatilities in credit options—an indicator of how volatile investors think the market may become—suggest investors are more interested in protecting against yet another major selloff than guarding against small steps down in markets.


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