- The average 5y CDS basis, that is, the 5y CDS level minus the level of the 5y point on the bond curve, is in a significantly negative territory, which is unusual.
- This chart shows the basis for names in the Markit iTraxx Europe index; the same observations can be made for the CDX investment grade index in the US.
- Initially, both bonds and CDS widened. In a crisis that is expected to be short-lived, buying protection makes sense, and we believe this is what banks and hedge funds did. Real money funds may still have needed to sell bonds.
- It was only after this that the basis widened. After the initial panic, we believe some of the index hedges would have been closed out, but there hasn’t been a rush back into corporate bonds. CDS are leading bonds tighter.
Source: Qontigo, Markit