Taking Position: Strait into synthetics

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Taking Position: Strait into synthetics

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Taking Position

Strait into synthetics

Taking stock of the rally 03 June 2026

Headlines of a potential longer truce to the geopolitical unrest in the Middle East have Credit Strategy

kept markets in check over the previous week. At the current juncture, we flag that Europe

valuations are starting to look stretched in places. While we can see implied vol premia Ioannis Angelakis

to remain in positive territory in Europe and thus we remain net sellers of at-the-money Credit Derivatives Strategist

implied vol, implieds in CDX IG look less appealing to enter new shorts here. Implied vols MLI+44 (UK)20 7996 0059

in CDX IG are below the 40pts level and half-way to the 35pts level (3M at-the-money ioannis.angelakis@bofa.com

vol), a hard stop, we think. Barnaby Martin

Credit Strategist

As such, while credit vol premia in the US credit market can broadly remain in positive MLI (UK)

barnaby.martin@bofa.com

territory (on the back of low realised vols), there is no room for further retracement of

Mohit Agarwalla

implieds to produce further sizable upside for short vol strategies via further vol Credit Strategist

retracement (Exhibit 5). Note that private credit has been under pressure again in equity MLI (UK)

mohit.agarwalla@bofa.com

space since early May, a headwind we think. Having said that, European implied vols and

spreads still have further to perform in relative terms, we think, should we see positive

newsflow on the geopolitical risk front (A positioning rebound).

Exhibit 1: Synthetics look cheaper to corporate bonds at the current juncture

10yr percentile ranks and z scores for EUR/USD CDS and cash markets (in OAS vs. Gov’t and ASW)

4.0 10yrs z-score (LHS) 10yrs %-ile rank (RHS) 30% 40%

3.0 24% 20% 30%

2.0 12% 20%