Directional correlations

Directional correlations

Tuesday 2 April 2024 14:02 London/ 09.02 New York/ 22.02 Tokyo

SRTx mirroring SRT market developments

SCI launched the SRTx (Significant Risk Transfer Index) 12 months ago with the aim of providing market participants more insight into the arcane world of SRT. The SRTx is a suite of indexes covering the EU and US regions, comprising a spread index that estimates generic new-deal pricing levels based on a ‘benchmark deal’ and a set of market sentiment indexes for volatility, liquidity and credit risk (SCI 3 March 2023). One year on, it is clear that the benchmark’s directional correlations have generally mirrored overall SRT market developments.

The monthly SRTx fixings have tracked key idiosyncratic movements since inception in March 2023. For example, a spike in the SRTx Volatility Indexes (a higher number indicates increased risk) was recorded across the board in November 2023 – following the outbreak of conflict in the Middle East (SCI 2 November 2023) – before dropping back down the month after.

Index Level at Mar-23 Level at Mar-24 Change in level
SRTx™ CORP EU 1094 965 -129
SRTx™ CORP US 1275 807 -468
SRTx™ SME EU 863 1110 +247
SRTx™ SME US 1117 1228 +111
SRTx™ CORP VOL EU 50 56 +6
SRTx™ CORP VOL US 56 54 -2
SRTx™ SME VOL EU 63 56 -7
SRTx™ SME VOL US 67 55 -12
SRTx™ CORP LIQ EU 50 42 -8
SRTx™ CORP LIQ US 56 36 -20
SRTx™ SME LIQ EU 63 44 -19
SRTx™ SME LIQ US 58 40 -18
SRTx™ CORP RISK EU 69 53 -16
SRTx™ CORP RISK US 81 50 -31
SRTx™ SME RISK EU 69 53 -16
SRTx™ SME RISK US 75 50 -25

Year-on-year, the SRTx CORP EU and SRTx CORP US spread indexes (covering large corporate SRT) have tightened, while the SRTx SME EU and SRTx SME US indexes (covering SMEs) have widened. Notably, the SRTx CORP US index tightened by 468bp over the 12-month period, reflecting improving sentiment in the broader US credit market.

Meanwhile, the sentiment indexes have overwhelmingly improved, with nearly all indexes declining to 50 or below (below 50 indicates a better outlook), again reflecting improving sentiment in the broader credit market. The SRTx Liquidity Indexes all now stand well below 50, with the SRTx CORP LIQ US index seeing the greatest improvement within that segment, moving lower by 20 points.

The SRTx CORP RISK US and SRTx SME RISK US indexes saw the greatest improvement overall, reporting a 31-point and 25-point reduction in their levels respectively. The outlier for the sentiment indexes is SRTx CORP VOL EU, which posted a six-point increase in its level, indicating a slight worsening in outlook for the segment.

About the SRTx (Significant Risk Transfer Index)
SRTx coverage includes large corporate and SME reference pools across the EU and US economic regions. The index suite comprises a quantitative spread index - which is based on survey estimates for a representative transaction (the SRTx Benchmark Deal) that has specified terms for structure and portfolio composition - and three qualitative indexes, which measure market sentiment on pricing volatility, transaction liquidity and credit risk.

Specifically, the SRTx Volatility Indexes gauge market sentiment for the magnitude of fixed-spread pricing volatility over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating volatility moving higher.

The SRTx Liquidity Indexes gauge market sentiment for SRT execution conditions in terms of successfully completing a deal in the near term. Again, the index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that liquidity is worsening.

Finally, the SRTx Credit Risk Indexes gauge market sentiment on the direction of fundamental SRT reference pool credit risk over the near term. The index scale is 0-100, with levels above 50 indicating a higher proportion of respondents estimating that credit risk is worsening.

The objective of the index suite is to depict changes in market sentiment, the magnitude of such change and the dispersion of market opinion around volatility, liquidity and credit risk.

The indexes are surveyed on a monthly basis and recalculated on the last trading day of the month. SCI is the index licensor and the calculation agent is Mark Fontanilla & Co.

For further information on SRTx or to register your interest as a contributor to the index, click here.