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Ah Summer! Let's Decompress

27 July 2015 by lberuti

During the most recent tightening phase that took iTraxx Crossover (ITXEX) from 350bps early July to 260bps a week ago, the basis (i.e. the difference of ITXEX quoted prices and its theoretical value) reached extreme levels and was worth more than 80cts at times. When the commodities’ tumble started to get some air time and pushed the basic materials sector wider, the conditions were there for ITXEX to correct rapidly as it also includes the highest beta names. The 35 cent change in ITXEX’s basis explains more than half of ITXEX’s underperformance compared with iTraxx Main (ITXEB) from a beta adjusted basis. ITXEX widened 10bps more than its usual relationships to ITXEB would suggest, and it could be much more in the coming days if China does not stabilise.