J.P.Morgan: Buy Protection On CDS Indices

J.P.Morgan note that their Fear&Greed index has signalled a return to overbought territory for CDS indices, suggesting that the space is “due a correction wider.” Their previous “Fear&Greed signal in late November was driven by concerns over the more virulent Omicron COVID-19 variant, which saw spreads reach a local wide; subsequent data indicated that while more contagious the latest variant is less severe leading to a rally through December.”

• Having returned back to tights and trading through their ‘22 year-end spread forecasts, J.P.Morgan now think “that it's prudent to position for wider CDS spreads over the coming weeks. The reduced severity of the Omicron variant has led many to conclude that we are entering the final stages of the COVID-19 pandemic,” a theory that they “are partial to.” In their view “this only means that, as virus concerns fade, rates and QT will once again become the focus of investor attention, which points to wider spreads.”
• While they “anticipate all CDS indices moving wider, given the rally in high yield spreads,” their preference is for “investment grade over high yield in CDS and for the U.S. to outperform Europe,” this means that their favoured short would be in the iTraxx Crossover.