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It Is Down To Basis, Stupid !

09 January 2017 by lberuti

In the credit index market, compression/decompression is a theme that is getting a lot of attention. People look at investment grade vs high yield, they look at senior vs sub, emerging markets vs developed markets, and so on. Recently they have focused on the relationship between iTraxx Main (ITXEB)and iTraxx Crossover (ITXEX). Since the beginning of the year, a popular strategy has been to buy ITXEX protection in anticipation of tougher times ahead and of a building issuance pipeline and to sell ITXEB protection in order to get some carry back with the assumption that financials should fare reasonably well. That has pushed ITXEB almost 4bps tighter at 69bps over the last 5 trading sessions, while ITXEX is a couple of bps wider at 290bps over the same period. But so far it has not been backed at a micro level (the latest example being MTNLN – Matalan – which was 3.5pts or 200bps tighter following the publication of its results) and most of the under-performance of ITXEX is down to the relative performance of the bases of these 2 indices.