They’re baaaa-aaaack.
Greek basis trades, that is. About a year ago, banks first started recommending negative basis trades — which saw investors buying a (cash) Greek bond
and then taking out insurance (CDS) on the holding. It only works once spreads in the CDS market are lower than in the cash market, something which rarely happens and tends to get arbitraged out quite quickly. To paraphrase Reuters blogger Felix Salmon, you are buying the bond, fully insuring it, and locking-in risk-free profits just by holding to maturity.
This basis strategy, however, is rather different. It’s a positive basis trade on Greece. That is, selling the bonds and CDS on the assumption that the difference between the two will narrow or disappear.
It’s the big new thing according to Mark Schofield at Citigroup, who takes a look “at the increasingly popular short CDS basis trade” in a piece of Friday research. And it’s all because of that pesky CDS issue, will it or won’t it trigger CDS payouts (or ‘credit event’) in a soft restructuring of Greece.
by Tracy Alloway
Financial Times
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