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Back To Where They Belong

01 July 2015 by lberuti

Over the past year, we have been given the opportunity to comment the fact that bases, and more specifically the iTraxx Crossover (ITXEX) basis, had turned more negative since the launch of the series 22 in Europe. Most of the time, ITXEX has traded tighter than its theoretical value. But since April the dynamics seems to have changed. Bases have edged wider across the board, and this phenomenon gained speed recently. With the latest twists in the Greek saga and the announcement on Friday night of a referendum, the ITXEX basis has even reached level not seen since 2012 as investors rushed to buy protection on indices in Europe, leaving single names behind on Monday. Since then, indices came back from the wides and single names played catch up, bringing bases to more reasonable levels. Given the acrimonious tone between Mr Tsipras and Greece’s creditors since the beginning of the week, whatever the outcome of Sunday’s vote, the market will remain cautious for a while and there will be bumps along the road. That means that demand for macro hedges should be here to stay and together with it, positive bases.