UBS recommends reg-squeeze European credit trade

UBS strategists yesterday suggested putting on a long European sovereign and short investment grade corporate trade yesterday. The bank recommended selling protection on SovX at 67.75bp and buying iTraxx main in the same size at 74bp.

In a research note sent to clients, UBS said this slightly negative carry trade should perform well not for fundamental credit reasons, but because of technical factors. It said the European Commission’s study into sovereign CDS trading could drive out buyers of protection. Meanwhile, the number of negative catalysts on Greece is diminishing, after the market has taken in its stride the recent bond issue, news of strikes and revelations about the country’s economic statistics. “The shock factors are gone,” writes analyst Tommy Leung.