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It Had To Give

30 July 2018 by lberuti

Throughout most of last week, there was a significant disconnection between the price action on credit indices and the price action of CDS referencing single name entities. It was most obvious on iTraxx Crossover (ITXEX) moved in a straight line from a wide of 295bps on Monday to 277bps at the close on Thursday, while during the same interval its theoretical value (computed using the individual risk premia of its constituents) hardly moved. As a result, the basis of ITXEX series 28 (the difference between the quoted value of the index and its theoretical value) went to its most negative value over the last 12 months and reached almost 1%. It triggered multiple arbitrage attempts where people were looking to buy ITXEX protection and sell protection on its constituents. A number of these succeeded. They left dealers owning single name CDS that they have not been able to recycle right away. It was no surprise that, since Friday, while index protection traded wider, single name protection traded sideways and even closed tighter today, as everybody is trying to move to the next trade.