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Volatile Basis

06 January 2015 by lberuti

If you look at the daily total variation of iTraxx Corssover (the sum of the absolute value of the daily moves), 2014 was the less volatile year since the Lehman debacle, with a total variation of 1582bps which is a far cry from the 3200bps total variation observed in 2011 and 2012, or even from the 2030bps of 2013. If you look at the total variation of the index basis though, the picture is somewhat different: 2014 was less volatile (997bps in 2014 compared with 918bps in 2013, 1247bps in 2012 and 1391bps in 2011), but the discrepancies are less important, and as a portion of the index total variation it has been rising substantially. If you look at the above Grapple, you will also see that as 2014 wore on, the basis became more and more volatile. This phenomenon has been amplified by the constant stop and go experienced by the market towards the end of the year. Contradicting forces (CB relentless interventions, drop in oil, turmoil in Russia, political uncertainty in Greece) have pushed credit indices back and forth, while their fair values were more stable, as single name traders waited for trends to be confirmed before changing their prices. The beginning of 2015 is no different, and investors’ nervousness is palatable. That should make 2015 an interesting vintage for basis trading.