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A New Basis Pattern?

27 March 2015 by lberuti

Historically we have been used to seeing the on the run series of iTraxx Crossover, the hedging instrument of choice for high yield cash portfolios, trade with a positive basis. If you click on any crossover series prior to 21 on the right end side, you will get the same pattern. The basis was positive during the debut trading of the index and then progressively turned negative when it became off the run. As you can see, Series 22 offers a notably different picture. The inclusion of more yieldy names which were mostly new to the CDS market has increased the dispersion of spreads within the index. Investors have also been looking at ways to get some carry and the wider spread offered by iTraxx Crossover S22 appeared compelling given its intrinsic diversification. These two factors were undoubtedly behind the mostly negative basis that it has known since its launch in October 2014. During the course of last week, since the launch of series 23, people have unwound their long risk positions on S22 and positioned themselves on S23 which they expect to be more liquid going forward. S23 is therefore trading with a negative basis while the basis of S22 is fast approaching 0. If QE is with us for a while and continues to depress returns, that could well be the new Crossover basis pattern.