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Index like a Steamroller

01 April 2014 by HCM

The credit index is from time to time like a steamroller. When all investors are rushing to unwind macro hedges, the index is crushing all the single name CDS. However, the index face some resistance. The index is going too fast and the index basis start to trade negative. The on-the-run investment grade index basis in Europe and in the US are both closing at -10cts. The indices are 10cts to expensive compared to their fair value, an equivalent of 2bps. Looking at historical value we are going to be close to the one year low. In this context, the basis is a compelling investment opportunity as a gamma play. In any sharp widening, the index will underperform the single names. The basis as a limited downside on any grind tighter.