15 February 2017 by lberuti
It is now a year that the CDS market has switched to semi-annual rolls – they used to be quarterly -. Every six months, the standard 5-year maturity is extended by six months. On the 20th March, standard 5-year will be pushed from December 2021 to June 2022. When that happens, CDS maturing in December 2021 will become progressively less liquid and will be affected by roll down (the risk premium of a 4.5-year CDS is lower than the risk premium of a 5-year CDS except for really distressed names). That seems to be already playing on traders’ mind and over the last week or so there has been an urge in the market to get rid of unnecessary 5-year CDS protection. It has been mostly felt in Europe, and high beta and financial names have been the most affected. It probably explains why bases have been gradually trending higher (index protection is wider than the theoretical value computed with the risk premia of the constituents) despite the positive tone of the last few sessions which usually goes hand in hand in more negative bases as indices react more rapidly.