On March 10, Markit gave information on the new participants in the upcoming IG12 on-the-roll investment grade index. The current IG11 index is set to roll into the new index on March 20, and continuing on the high turnover rate seen in the IG10-11 roll, in which 10 names were exchange, the current roll swaps out another 9 names. The majority of the removals are fallen angels with only one M&A predicated adjustment, based on the the Pfizer-Wyeth transaction.
One problem with the new additions is that these are substantially less popular names, based on the net notional in CDS outstanding. The removals amount to $18.2 billion while the additions account for merely $8.4 billion in net notional, based on DTCC data. Also as the average adjusted spread of the removals is 700 bps wider then the additions, it is likely that the roll tightening will be substantial with estimates ranging in the 40-45bps range. It is likely that accounts may prefer to stick with trading the IG11 for an extended period of time due to hedged positions established in many of the names that are getting kicked out with the roll.
Due to much lowered liquidity in CDS trading recently, it is not immediately clear how the removals and additions will impact the single-name CDS trading levels of these companies.
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