Negative-basis trades have started to wane in hybrid asset-backed securities collateralized debt obligations as new players entering the market allow banks to place tranches. Previously, firms were buying credit-default swap protection on super-senior tranches that could not be laid off elsewhere, and pocketing the difference in spreads.
The trade opportunity still exists--super-senior BBB cash bonds are trading around 30 basis points compared with comparable CDS at 15 bps, traders said. But new entrants, including structured investment vehicles and prop desks, are buying super-senior tranches so dealers are less dependant on negative basis trades. Buyers of the tranches are not themselves entering the trades because super-senior bonds are low risk to begin with and the cost of protection diminishes their spread.
Scott Eichel, senior managing director in ABS trading at Bear Stearns in New York, said the development is a sign the market is maturing.
