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And Then They Were Gone

09 June 2015 by lberuti

Greece and interest rates have grabbed all the headlines recently. Over the last month, they have been the main drivers of the market moves. Even though there were pockets of activity on single name credits, the bulk of the trading took place on indices, allowing investors to be hedged and wedged with the never ending stream of contradicting pieces of news regarding Greece. On indices, the vast majority of trades was actually done on the “on the run” series of iTraxx Main, iTraxx Crossover or iTraxx Financials. The activity on “off the run” has ground to a halt, leading to the unusual situation where all the index bases are roughly the same when expressed in bps. You can see on the above Grapple that the points corresponding to the current situation are pretty much aligned, when they were not a month ago when every index was still living its own (almost) independent life. That is great if you are a basis relative value player as convergence as fully played out. Divergence will certainly reappear when normal service resume in the market (ie when the Greek psycho drama ends) though. To go from one distorted situation to another, you need to go through a more homogenous phase. That is the index basis equivalent of the Intermediate Value Theorem in mathematics.