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29 July 2014 by HCM

Before the financial crisis the iTraxx Europe index was trading through its fair value, the basis was negative. The CDX NA was trading wider than the European index and the CDX was trading more or less on its fair value. In April 2010, the iTraxx Europe started to trade above the CDX NA. The index started to be cheap to its fair value and the CDX more expensive. Today, for the first time since 2010, the CDX fair value is wider than the iTraxx Europe fair value, but the iTraxx Europe is still wider than the CDX NA. Going back to a world where European credit is safer than the US credit, the basis do no revert in the same way. It is lagging as hedger are still focused on the European credit. The index basis is still offering a credit neutral way to play the outperformance of the European credit versus the US credit. Selling the iTraxx Europe (BTX) basis at 10cts and buying the CDX NA basis at -3.5cts is offering at 27cts pick up if both basis invert.