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Basis Explains Everything

07 January 2015 by lberuti

We had the move out since the beginning of the week, with credit indices flirting the recent wides of the series 22 (since the beginning of November that is). With the bottom in oil price not in sight yet and bad vibes coming out Germany regarding Greece, the tone was very cautious to say the least on Monday and Tuesday. But that cautiousness was expressed almost exclusively using indices, while their constituents were left largely unchanged (they were a little wider, but not by much). That sent the basis to local highs at +50cts on iTraxx Crossover, the most sensitive of all indices. Today, we had the move in, and it was all about consolidation. Indices retraced a good portion of the move wider, buoyed by Mrs Merkels comments regarding a potential Greek debt burden easing. But in a similar fashion, single name CDS were hardly touched. While iTraxx Crossover closed 15bps tighter, its fair value was a meagre 1.5bps tighter. And the basis went all the way down to -23cts. The basis is often seen as the speedometer on the credit market: it seems investors started full throttle only to stand on the brakes a couple of days later.