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Arbs Print, Bases Resist

06 January 2016 by lberuti

At the end of last year, bases (i.e. the difference between the quoted value of an index and its theoretical value computed with the risk premia of its constituents) made an attempt early December to normalise and tended to be less negative (index risk premia have been tighter than their theoretical risk premia for some time). That was short lived though and they were quickly back to historically negative levels at the end of 2015. Poor liquidity was blamed, as it was not allowing arbitrageurs to trade and collapse these bases. But now the market is fully open again, and arbitrageurs have been consistently buying protection on credit indices and selling protection on single names on both side of the Atlantic. It had no effect so far. On the back of poor sentiment towards risk, credit indices have seen their risk premia widen, but unabated pressure on commodities and recent worries around consumers have created an even larger appetite for protection in these sectors.