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Is Confidence In US Credits Waning?

13 April 2015 by lberuti

If you look at the above grapple, you will see that the basis of iTraxx Main (ITXEB) in Europe has been consistently more positive (or less negative depending on the period) than the basis of CDX IG in the US. You will get the same picture irrespective of the timespan you select and certainly over the last 3 years. Because of the unwavering commitment of the FED to provide unlimited liquidity, CDXIG was seen as a safe haven whenever investors were looking for a source of carry, creating a consistent supply of CDXIG protection, hence the persistent negative basis. Because of the sovereign crisis in Europe, investors have never felt entirely comfortable with European credits and were quick to buy ITXEB protection as a macro hedge for the European part of their portfolio, providing a deep bid for ITXEB protection, hence the persistent positive basis. But over the last few months, the ECB has started their QE operation and the FED is exiting theirs. Guess what? The two lines just crossed each other, and it would not be surprising that the basis of CDXIG trades on top of ITXEB’s for a while going forward