Recent underperformance of longer-dated index equity tranches relative to five-year equity tranches has traders seeing a rise in relative-value trading opportunities. One popular trade, called a five-to-10-year equity flattener, has investors going long CDX5 10-year equity risk--selling credit-default swaps on the 10 year--and short CDX5 five-year risk, said Ashish Shah, co-head of credit strategy at Lehman Brothers in New York.
Trades across equity tranches of different maturities have grown out of increased issuance of seven- and 10-year CDS index super-senior tranches, Shah said. Overcrowding in five-year super-senior tranches last year caused value to be squeezed both down the capital structure (DW, 10/7) to equity tranches and across maturities to longer-dated super-senior deals (DW, 9/23). Value in seven- and 10-year super senior tranches is just now starting to be redistributed, causing longer-dated senior tranches to tighten and longer-dated equity tranches to widen.