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Cash vs CDS: Hedged And Wedged?

24 November 2014 by lberuti

Today credit indices kept their march tighter. iTraxx Crossover, iTraxx Main, CDX IG and CDX HY were 9bps, 2.75bps, 1.5bps and 7bps tighter respectively. Because bases to theoretical values were already stretched at the beginning of the session, offers of protection rapidly built up on single names and most finished the day meaningfully tighter (2bps on average in investment grade and 10bps in crossover/high yield). At the same time, cash bonds’ momentum is somewhat stalling. If prices were holding up, they did not keep up with pace of CDS. That can be explained by recent outflows, particularly among high yield funds, and also the amount of new issues which were brought to the market over the last few weeks. As usual, this will put a few people in an uncomfortable position, particularly dealers who hedge exposures they deem too large on cash using CDS.