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Index Positioning Does Not Explain It All

20 January 2016 by lberuti

Believe it or not, despite a 10bps widening of iTraxx Main (ITXEB24) - from 86bps to 96bps -, buy side institutions have (almost) not bought protection on that index last week. They only cut their long risk positions by the equivalent $0.4bln across the 8 most recent series. That probably goes a long way in explaining the stubbornly negative basis (the difference between the quoted value of the index and its theoretical value) of ITXEB, as investors rushed to buy single entity CDS on the energy sector. The reach for protection on oil related names was even fiercer in the US (the sector is whopping 85bps wider at 455bps in investment grade over the past 5 sessions). So fierce that even a reduction by a third of long risk positions in CDXIG – from $36.8bln to $22.9bln across the 8 most recent series – and a 12bps move wider – from 97bps to 109bps - did not prevent the basis to reach the most negative levels since the Great Financial Crisis. That trend only accelerated today, and the basis of CDXIG25 stood at almost 1% at the European close.