Increased trading at different maturities across the CDX and iTraxx corporate credit indices this year has for the first time created a smooth curve. The increased liquidity in tranches of every maturity ranging from three to 10 years has encouraged relative value trading between the different series, which in turn caused the tranche curve to soften, said Ashish Shah, co-head of credit strategy at Lehman Brothers in New York.
A smooth curve means investors can easily buy or sell a full range of maturities without wide bid/offer spreads. Previously most trading was focused at five-year tenors and sporadic interest at three-year or seven- and 10-year meant wider bid/offer spreads. Traders reported bid/offer spreads for three-year and seven-year maturities have come within a few basis points of those of five-year maturities.
Off-the-run tranches of the index have also been trading closer to the current indices this year. The increase in liquidity has been attributed to new firms entering the structured credit market.