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A new Pattern on Credit Index Basis?

08 October 2014 by pdonnat

Since the emission of the new indices last Monday, a new pattern has emerged. The credit indices are trading tight to their fair value. The index trading levels are tighter than the average of their single names members. This is rather unusual as the indices are rather used for hedging purpose and the flows are imbalanced with more buyers than sellers of protection. This roll is different. All the basis have collapsed, with the iTraxx Crossover very negative into this close. As per the graph, even the investment grade on-the-run credit index basis have collapsed with the CDX Investment Grade trading 6bps below its fair value (-30cts), close to 10% of the spread. The current trading level of the index is around 68. Tomorrow, the CDX High Yield index is expected to be launched. This index is still trading cheap to its fair value. We are interested in observing if the new pattern affect this index or if the recent trading activity has produced a rather unusual market configuration and we will go back to the index usual behaviour shortly.