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The Volatile Summer of Bases

18 August 2014 by HCM

The basis between the indices and their theoretical value computed using the individual prices of their constituents is usually not a very useful indicator regarding the next move of the market. It merely tells you what the direction of the previous move was, as the single names’ velocity is lower than the velocity of indices. Because indices have been so range bound in the recent period despite some fierce moves, the changes in basis have accounted for a good portion of the total variation of indices. For instance, during the move that took iTraxx Main from 60 to 71 and back to 61 between the 23rd July and today, the basis went 0 to 24cts (or 5bps) and back to 2cts (or 0.5bps). The basis explains 50% of the move both on the way out and on the way in. While index traders exhausted themselves over the last couple of months, their colleagues who trade single names CDS had a much more chilled summer.