Greece debt volatility provides openings for basis trading

The bond-CDS basis trade is back with a vengeance, sparked by volatility in the debt of Greece – not to mention that of Ireland and Portugal. But the macro picture for these sovereigns has become so clouded that it takes a strong stomach to consider the trade

Enzo Puntillo, Swiss & Global: Basis trades work best when bonds are trading close to par

The ongoing volatility among peripheral European sovereigns has opened up a basis between credit derivatives and bonds that is large enough to drive a coach and horses through, with room to spare. In particular, there has been a massive bond sell-off at the short end of the Greek sovereign curve, exacerbated by the debate among European policymakers over the shape of Greece’s second bailout.

In contrast, levels in the credit default swap (CDS) market have remained relatively static, with the