25 June 2014 by HCM
Single names CDS rolled on the 20th June as they do each quarter, and the most liquid maturities have been pushed by a quarter. For instance, the “on-the-run” 5 year maturity is now September 2019 while it was June 2019 a week ago. Credit indices on their side only roll twice a year, and the “on-the-run” 5 year investment grade index is still iTraxx Main S21 with a June 2019 maturity. On indices, on the 20th June, dealers just took things where they left it the day before and resume trading as if nothing had happened. On single names, dealers should have factored in their prices the maturity extension. But there is always a tendency to leave their 5 year quotes unchanged, or at least a tendency not to reflect fully the increase in risk premium coming from the 3 months added to the maturity of new on the run contracts. This is particularly true in a bullish environment, like the one which prevails at the moment. This grapple shows that this naturally led to an increase in the basis between credit indices and their theoretical values.