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ITXEB: The Basis Will Not Protect You

16 June 2014 by HCM

Credit indices have now closed wider during a number of sessions (5 in a row). Not surprisingly, while some people have obviously been looking for a way to take chips off the table (and indices are arguably an efficient way to do so), others are considering bottom fishing. The argument among the latter revolves around which index they should choose. Some dealers are advising clients to use the basis to theoretical prices as an indicator, and hence favour selling protection on iTraxx Main (ITXEB) to go long risk as the basis has been creeping higher recently. But at a paltry 5cts, the basis does not provide you with a substantial cushion and is still far off the levels it usually reaches when the market is under any kind of stress. In January for instance when the Emerging Market mini crisis broke, the basis of ITXEB went to 27cts. Current basis levels look reasonable across the board, and should not be used as a guide to make a directional punt on the market.