(Probably) rookie question for any credit trader out there:
Why wouldn't you be able to take that trade?
Short T 6.125 08/15/29 Long CVS 9.35 01/10/2023 Corp Long CVS CDS USD SR 5Y D14 Corp
Earn 496 bps, Lever up, Repeat.
I assume you can't because the basis has been slowly decreasing from -584 on Nov 30, with no apparent big size trade. (HS on BBG)
It's not the same entity...
Damn it, I knew there was a rookie mistake somewhere.
How about this trade:
Short T 2 ½ 08/15/23 Long YUM 3 ⅞ 11/01/23 Corp Long YUM CDS USD SR 5Y D14
= 79 bps.
Think about the basis as the difference between the CDS - ASW
ASW is the asset swap spread. While the the drivers of the basis are quite technical, I think the most straightforward driver is liquidity. As the credit deteriorates, hedge funds will bid up the price of the protection. The cash bonds, however, are more difficult to short (repo market) and may be held by real money accounts who do not actively trade. This creates a positive basis situation. We could sell CDS and short the closest maturity cash bond.
Agreed. Still doesn't explain why the trade I mentioned above still returns a decent basis with no one taking the trade? (This is a long bond trade, so you don't have the challenge of repoing the bond...)
lots of neg basis trades blew up in past. basis can widen and require you to post collateral. wilmott i think had an interesting article on this.
can be a pain to unwind if name is illiquid
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