Dealers using credit derivatives indices to hedge bespoke collateralized debt obligation issuance have disjointed spreads in the mezzanine tranches of both the European and U.S. credit derivatives indices, causing them to cross for the first time.
The 10-year U.S. CDX index is now trading tighter than its European iTraxx equivalent after CDX tightened 17 basis points and iTraxx widened 30 basis points over the last month. Except for a short blip during the correlation upset in May last year, CDX has always traded wider than iTraxx because it comprises riskier names.
Olivier Renault, strategist at Citigroup in London, said the firm is suggesting relative value trades based on the disjointed index tranche prices returning to previous levels. In such a trade, an investor could buy protection on 10-year CDX 7-10% at 99.5 basis points and selling protection on 10-year iTraxx 6-9% at 126bps.
