Taking Position: Back on a straight line

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Taking Position: Back on a straight line

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Taking Position

Back on a strait line

Summer hedges are cheap 24 June 2026

European credit spreads and vols have underperformed since late February – and for Credit Strategy

good reason. The European macro cycle is linked more to the energy market than the US Europe

and higher oil prices are presenting bigger headwinds too. However, despite oil prices Ioannis Angelakis

still sitting above late-February levels, synthetic spreads and credit vols are tighter/lower Credit Derivatives Strategist

than before the start of the conflict in the Middle East. MLI+44 (UK)20 7996 0059

ioannis.angelakis@bofa.com

Exhibit 1: Oil prices remain still above end-February levels, while credit risk metrics (5y CDS Barnaby Martin

spreads and implied vols) have compressed and now sit inside end-Feb levels Credit Strategist

Credit has been “over-pricing” the positive newsflow from the Middle East, more than commodity markets MLI (UK) barnaby.martin@bofa.com

6 Mohit Agarwalla

Credit Strategist

4 MLI (UK)

mohit.agarwalla@bofa.com

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-4

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Main CDX IG Main CDX IG

Oil Spreads iVols 3M

Source: Bloomberg. Level differentials vs late-Feb levels

BofA GLOBAL RESEARCH

We think implied vols (especially in Europe) have lower capacity to retrace from current

levels, and this will limit additional support for risk-taking until oil prices decline further.

As central banks have moved to the hawkish side, more rate hikes could soften market

sentiment further and thus trigger a renewed need to hedge downside.

We think that out-of-the-money payers are attractive here – a result of the combination

of tight spreads and low implied vols. And this is not based on a view to own implied vol

per se, but to own cheap downside convexity.