Basis Widening in High Yield

In the North American High Yield space, money is unwinding cash bond exposures and hedges aren’t moving. Check out the basis. Note that late March and early April is a technical issue related to the CDX index roll. Mid June exhibited a very tight basis (right-hand scale). Since then the widening has been dramatic, moving over 40 bps in less than a month. But the basis is pretty much where the drama has played out.

Europe Investment Grade has seen far more fireworks, due to proximity to Greece. Synthetic credit in the Main has sold hard.

The reasonably close analogue of high yield in Europe is the cross-over index, because the high yield market in Europe is not as developed as in North America. Taken in context, it could be worse and likely will be. In fact, spread levels in XO have not yet reached levels seen at the beginning of the year. It seems more than reasonable to see continued widening without resolution of the ongoing headline risks.


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