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Kudos To Arbitragers!

14 September 2015 by lberuti

In the past, credit indices have seen many technical situations arise. The most (in)famous was the London Whale episode during which protection on the series 9 of indices was sold aggressively and pushed the basis (difference between the quoted value of an index and the theoretical value derived from its constituents) to extremely negative levels on both CDXIG in the US and iTraxx Main (ITXEB) in Europe. Regularly, flow on “off the run” series create some dispersion in basis between index families, but also within index families. At the moment, the above grapple shows that currently on iTraxx Crossover (but you would have the same picture if you choose ITXEB) the basis is roughly a linear function of the maturity (i.e. it is the same expressed in bps irrespective of the maturity). It also shows that the ranges exhibit the same property over the last year. Bases seem unable to go out of the -20bps/+20bps cone. During that period, arbitragers had the resources to keep them in check.