Measuring the dynamics of trading the CDS-bond basis
The CDS-bond basis is a credit factor that allows investors to capture yield by targeting the difference between the trading levels of CDS and bonds of the same issuing entity.
Historically it has been difficult to capture this factor on indices due to the mismatch in exposure of the available instruments.
It is important to remember that anyone with a credit portfolio, whether holding cash bonds or CDS, is likely to be long or short CDS-bond basis. In this note, we set out: i. an introduction to CDS-bond basis; ii. what drives the basis; iii. how investors can trade it and the instruments available; iv. introduction to the iBoxx iTraxx Europe Bond Index; and v. how to implement a basis trade. We focus particularly on the European investment grade market, where a new iBoxx bond index allows investors to accurately match CDS and bond index exposure and capture any available basis more efficiently.
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