CDX protection buyers are starting to drive spreads on the idex slightly wider relative both to the underlying names and last week's index tights. John Tierney, director and head of quantitative credit strategy at Deutsche Bank in New York, said this is a reversal of last month's sell-off.
Hedge funds over the past several weeks sold protection on the CDX because positive first-quarter earnings and general expectations of a short-term interest-rate pause at 5% contributed to the perception of more distant event risk. But players who were riding the tightening are starting now to unwind those positions and buy protection, driving CDX spreads and basis between the index and underlyings back out.
The CDX crept up to 37 basis points Wednesday, compared with 34 bps May 2 and around 40 bps at the end of April.
